RECAPPING LAST WEEK
U.S. equity indices managed to hold onto weekly gains despite macroeconomic headwinds,
including the ongoing government shutdown, trade tensions with China, and rising concerns
about private credit and regional bank loans. The S&P500 and Nasdaq Composite indices gained
around 2%, while the Russell 2000 ended higher by 2.4%, declining slightly from a new record
high reached midweek. All sectors posted positive performance, but financials lagged despite
strong earnings reports from the large U.S. banks. Shares of Zions Bancorp tumbled after
revealing losses tied to commercial and industrial loans, while Western Alliance sank after
disclosing a lawsuit it had initiated regarding a business loan. Gold futures jumped over 7% to
near $4,400 before pulling back on Friday after some positive signs emerged in U.S.–China trade
relations. President Trump said that the proposed 100% tariffs on goods from China were not
sustainable and confirmed that he would meet with Chinese President Xi Jinping in two weeks. Oil
futures fell 1.7% while cryptocurrency prices remained under pressure for a second straight week.
U.S. economic news was limited as the government shutdown extended into a third week, with no
resolution in sight. As a result, Treasury yields briefly touched the lowest level since April as
investors remained somewhat in the dark on the health of the U.S. economy. At a conference, Fed
Chair Powell delivered prepared remarks noting that data available prior to the shutdown reflected
economic activity on a modestly firmer trajectory than expected. He also said the outlook for
inflation and employment does not appear to have changed since the last FOMC meeting,
signaling that another quarter–point rate cut is likely later this month. With September’s official
retail sales report delayed, the Chicago Fed Advanced Retail Trade Summary estimated a 0.5%
advance, though higher prices likely impacted that rise. Regional manufacturing surveys showed
mixed results, as activity increased modestly in New York state this month while the Philadelphia
area slumped to the lowest level since April. The release of housing starts and permits was
delayed, but the latest NAHB housing index reading jumped to 37 in October from 32 as future
sales expectations topped the breakeven level of 50 on optimism for lower mortgage rates.
Overseas, China’s exports rose 8.3% last month while shipments to non–U.S. ports grew nearly
15%. The limited impact from U.S. tariffs on overall trade may give China leverage in trade
negotiations. Domestic consumption remained weak as China’s consumer and producer prices
fell 0.3% and 2.3% YoY, respectively. Finally, the British economy expanded by just 0.1% in
August, suggesting that Q3 GDP may decelerate from the lackluster 0.3% growth in Q2. UK
employment has held up better than expected, however, and wage growth has cooled slightly.
THE WEEK AHEAD
Although the S&P500 and Nasdaq Composite indices clawed back roughly half of the prior week’s
losses, and the Russell 2000 reached a new high, the volatility index’s elevated level suggests
that investors remain on edge. Late last week VIX nearly touched 29 in the Thursday–into–Friday
overnight session before settling close to 21—still indicating a healthy amount of fear given lofty
equity values. This week, investors hope for progress on ending the shutdown and more clarity on
trade issues, while keeping an eye on geopolitical events and the credit markets. In the U.S., the
delayed September CPI report is scheduled for Friday—observers expect headline inflation to
have increased 0.4% MoM and 3.1% YoY—an increase from 2.9% YoY the prior month. The other
important economic releases will be the flash PMI surveys for the manufacturing and services
sectors along with revised consumer sentiment and inflation expectations. Several earnings
announcements have market–moving potential, with reports due from Netflix, Tesla, IBM, Texas
Instruments, and Intel, among others. On the international agenda, China may set the early tone
for the week with the release of GDP, industrial production, and retail sales figures on Sunday
evening. In Japan, all eyes will be on the political process for election of the new prime minister,
set for Tuesday, while the latest inflation update arrives Thursday. Finally, in Europe the focus will
be on the flash PMI readings, plus UK CPI and retail sales.
(Schwab)
