Market Chat

The Days Ahead: The European long holiday keep things quiet. Jobs number on Friday.

One Minute Summary: We had three out of four trading days where the market moved by more than 1.3%. But there was no change over the week. Bonds had a good week. European markets were up but Asian stocks are still trying to figure out what the trade talks do for them. Companies like Toshiba, Sharpe and Nintendo were down 6% to 8%. The Euro and the Yen took a break from their steady rise this year but that was probably due to some cross-currency funding needs of major banks (the rule on overnight funding changed with tax reform).

Stock volatility feels high. But it's no different from its long-term average. Stocks have gradually got cheaper these last few weeks. We've seen no downward revision of earnings. While the economy is not quite the tear the tax cut crowd thinks, we’re a long way from recessions and economic downturns. Sentiment is shaken but if that flushes out some of the fast money especially at a quarter end, then… good.

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The Days Ahead: Fed meets. Look for any change to their economic projections.

One Minute Summary: Trade issues hung over stocks. The administration lined up China, which runs a $35bn monthly trade surplus with the U.S. It's quite a lot less if services are included but many businesses are annoyed at China’s freewheeling IP (Itellectual Property) transfers. The President asked for a $1bn a year reduction in the trade deficit but given that the deficit is more like $380bn and some 40% of the U.S. total, he probably meant $100bn. As for the new Chief Economic Advisor, Larry Kudlow, I’m hard pressed to remember anyone in that position who had much influence. But he seems like a decent enough fellow.

Small company bank stocks rallied. The Senate passed the snappily titled Economic Growth, Regulatory Relief, and Consumer Protection Act, which raises the threshold for enhanced supervision by the Fed from a $50bn threshold to $250bn. So, that’s nice if you're a Key Corporate, Fifth Third or State Street. You now no longer have to provide a liquidation plan. In fact, only 12 of the 43 banks with over $50bn in assets will come under enhanced supervisory rules. All others get a pass. And yes, they all took TARP.

Bonds rallied. Stocks were lower but small companies had their best two weeks of the year. They're now just ahead of large caps year-to-date. Europe recovered. It seems to be out of the trade crosshairs right now. Japan and Emerging Markets rallied some 2%. The dollar barely moved.

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The Days Ahead: The market is inflation sensitive right now. Tuesday’s CPI number will be important.

One Minute Summary: Mixed economic numbers. Blow-out job numbers (but yes, some caveats). The trade deficit widened, although there may be some relief on the oil side in coming months. Productivity stalled. The Fed’s Beige Book, a report that lives up to its title, was mostly more of the same “modest to moderate” (mentioned 193 times in a 32-page document) growth from the 12 districts. There were some reports of compensation increases but we put that down to state minimum wage increases coming into effect in January. Some 29 states have minimum wages above the Federal level (which is unchanged for nine years) and 18 of them raised them for 2018.

The week started with major concerns on the Administration’s policies but markets settled down mid-week. We're not out of the woods, of course. Thursday’s decision to limit steel tariffs to non-NAFTA partners means those issues now become part of the NAFTA discussions. The ECB said it would keep buying bonds for “as long as necessary.” That weakened the Euro.

Bonds were flat. Stocks liked the jobs number. The S&P 500 and European stocks were up around 3% to 3.5%. We're still 3% down from the market peak on January 26, but up 7% from the lows. The dollar took a round trip…down and then up.

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The Days Ahead: Italy heads to the polls. Non-farm payroll numbers. More fall-out from trade.

Jerome Powell did rather well in the semi-annual report to the House and Senate. His comments were slightly hawkish. Two points stood out.

One, he said that the Fed will “continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2%.” No argument on the second but the Fed’s mandate is employment and inflation not avoiding growth. So, yeah, that was odd.

Two, he said he finds "rule prescriptions helpful”, which is something the Fed has not pursued (thankfully) for the last few years otherwise Taylor rules and Philips curves would have led to much tighter policy.

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The Days Ahead: Second round of Q4 GDP. Italy heads to the polls.

Bonds are grappling with higher expected growth (even though we had some disappointing existing home sales, retail sales and Industrial Production) and the reawakening of the twin deficits story.

For those of you of a certain age, this was a big deal in the 80s and 90s. It’s basically a fear that growth will suck in imports and the, ahem, reformed tax regime won't bring in as much revenue as they hoped because, you know, “tax revenues are going down."

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Please join our investment counsel's live discussion on this week's activity in the markets.

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The Days Ahead: More earnings and some European economic news.

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The Days Ahead: More earnings and so far all good.

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