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Prices producers receive for goods and services fell 0.2% in December after rising 0.1% and 0.6% in November and October, respectively. Producer prices climbed 2.5% in 2018, the same increase as in 2017. A closer look shows that prices for goods dropped 0.4%, largely due to a 13.1% decrease in gasoline prices. Overall, energy prices fell 5.4% in December. Prices for services edged down 0.1% last month following three straight months of increases. The drop in prices for services was led by a 0.3% decrease in trade services (the margin between wholesale prices and retail prices) and a 0.2% drop in transportation and warehousing services.
According to the Federal Reserve, industrial production increased 0.3% in December after rising 0.4% in November. Manufacturing output increased 1.1% last month, its largest gain since February 2018. The output of mines rose 1.5%, but the index for utilities fell 6.3%, as warmer-than-usual temperatures lowered the demand for heating. Overall, total industrial production was 4.0% higher in December than it was a year earlier.
For the week ended January 12, there were 213,000 new claims for unemployment insurance, a decrease of 3,000 from the previous week’s level. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2% for the week ended January 5. The advance number of those receiving unemployment insurance benefits during the week ended January 5 was 1,737,000, an increase of 18,000 from the prior week’s level, which was revised down by 3,000.
DJIA: 24,706.35, up 2.96%
Nasdaq: 7,157.23, up 2.66%
S&P 500: 2,670.71, up 2.87%
Russell 2000: 1,482.50, up 2.43%
Global Dow: 2,901.05, up 1.88%
Fed. Funds: 2.25% -2.50%, unchanged
10-year Treasuries: 2.78%, up 9 bps
Stocks recorded their fourth consecutive week of positive returns and built on their strong start to 2019. The gains pulled the large-cap benchmarks out of correction territory, or within 10% of their recent highs, but the Nasdaq Composite Index and the smaller-cap benchmarks remained below that threshold. Within the S&P 500 Index, financials shares led the gains, helped by better-than-expected earnings reports from some large banks. The defensive utilities and consumer staples sectors lagged the overall market, with the former also dragged lower by a bankruptcy announcement from Pacific Gas and Electric (PG&E) due to expected liabilities from the recent California wildfires. Trading volumes were somewhat muted, especially early in the week, and volatility, as measured by the Cboe Volatility Index (VIX), continued its recent downward trend.
The ongoing U.S. trade dispute with China remained a significant driver of sentiment. A poor start to the week on Monday seemed partly due to news of a sharp decline in Chinese exports. A report in The Wall Street Journal on Wednesday that the U.S. was pursuing a criminal probe against Chinese telecom giant Huawei Technologies also took some of the steam out of a rally, according to traders, although markets managed to close higher for the day. Conversely, markets appeared to jump Thursday on reports that Treasury Secretary Steven Mnuchin had suggested lowering tariffs on some Chinese goods as a gesture of good will in trade negotiations. The White House later denied the accounts, however.
On Friday, stocks surged again on a Bloomberg report that, earlier in the month, Chinese officials offered to eliminate the country’s trade surplus with the U.S. by 2024, but U.S. officials demanded quicker action. Most economists agree that trade balances between countries depend in part on relative savings rates, making eliminating the U.S.’s overall deficit difficult to achieve by fiat — particularly as the federal deficit continues to grow.
The quarterly earnings reporting season began in earnest during the week, with reports from 35 S&P 500 companies expected, according to Thomson Reuters. Analysts polled by both Reuters and FactSet have recently lowered their estimates and expect the earnings growth rate for the S&P 500, as a whole, to have declined by roughly half in the fourth quarter from its 25% year-over-year pace earlier in the year. Analysts generally expect earnings to grow only modestly in the first quarter of 2019, when the impact of the December 2017 corporate tax cut on year-over-year earnings comparisons rolls off.
Longer-term bond yields rose for the week, as favorable economic data and continued equity gains lured investors away from the perceived safe haven of Treasuries. (Bond prices and yields move in opposite directions.) The municipal market started the week subdued, with most of the week’s activity centered around a $5 billion new issuance calendar. Most investors seemed to be patient in waiting to invest their January coupons, according to the firm’s traders, and the low activity in the market seemed to be centered around short-term issues. General obligation bonds from the Commonwealth of Puerto Rico struggled after an announcement that the federal oversight board is seeking to void nearly $6 billion worth of bonds issued in 2012 and 2014. The board contends that the bonds were issued in violation of the Commonwealth’s constitutional debt limits.
Investment-grade corporate bond spreads tightened across most sectors. The market rallied after the UK Parliament rejected the prime minister’s Brexit deal (see below), with UK and U.S. banks outperforming. Issuance for the week was slightly less than expected as of the close on Thursday. Traders observed steady buying across the credit curve, with less inventory available.
Technical conditions in the high yield market were supportive due to the combination of modest new issuance, the largest weekly inflow to high yield bond funds in roughly two years, and low dealer inventories. For much of the week, the market was focused on the timing of the PG&E bankruptcy filing and the implications for bondholders.
European stocks rose in line with global markets this week amid signs that the U.S. and China could resolve trade tensions and an increased likelihood that Brexit will be delayed after UK Prime Minister Theresa May’s Brexit proposal was overwhelmingly defeated in Parliament.
In the UK, the prime minister’s government survived a no-confidence vote after her Brexit deal was overwhelmingly rejected by a 432 to 202 vote in the House of Commons. May has until Monday to present a new plan and has begun cross-party negotiations; however, she and opposition leader Jeremy Corbyn were deadlocked, presenting competing Brexit alternatives.
Data showed that Germany’s economy decelerated sharply last year due to slowing consumer spending and weakness in key export markets. Gross domestic product grew 1.5% in 2018, the weakest rate in five years, compared with 2.2% in 2017.
The Nikkei 225 Stock Average gained 306 points (1.5%) for the week and closed on Friday at 20,666.07, ahead 3.25% in 2019. The large-cap TOPIX Index and the TOPIX Small Index also rose and ended the week with year-to-date gains of 4.25% and 3.05%, respectively. Japanese equities were lifted by positive developments in the U.S.-China trade dispute, as well as reports that China is taking steps to stimulate its economy. At the close of trading on Friday, the yen stood at ¥109.50 per U.S. dollar versus ¥109.69 at the end of 2018. Japanese markets were closed on Monday for Coming of Age Day.
China’s stock markets rose, as optimism about a resolution in the trade rift with the U.S. grew following reports that the Trump administration was mulling rolling back tariffs on Chinese imports to advance negotiations. For the week, the Shanghai Composite Index added 1.7%, and the large-cap CSI 300 Index, China’s blue chip benchmark, rose 2.4%.
Portions of the preceding information are reprinted with permission from Broadridge Investor Communication Solutions, Inc. Copyright 2019. Portions of the preceding information are shared from T. Rowe Price Weekly Market Wrap-Up.
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GYL Resnick Weekly Update – January 28, 2019