Market Perspective for October 11, 2019

The U.S. and China reached a tentative trade deal and the Federal Reserve announced another round of asset purchases. The Nasdaq advanced 0.93 percent on the week, the Dow Jones Industrial Average 0.92 percent, the Russell 2000 Index 0.75 percent and the S&P 500 Index 0.61 percent.

The U.S. and China reached a tentative trade agreement, dubbed “Phase 1” by the two sides. The U.S. will delay its planned tariff hike on October 15 as part of the agreement, but a formal deal has yet to be written and signed. iShares China Large-Cap (FXI) rallied 2.73 percent this week.

A deal on the United Kingdom’s exit from the European Union, or Brexit, also looks possible after the UK and Ireland negotiated the border with Northern Ireland. Both the UK Prime Minister and EU negotiator hinted an agreement can be reached. iShares MSCI United Kingdom (EWU) increased 3.48 percent on the week. The British pound increased 2.65 percent versus the U.S. dollar.

The Federal Reserve stated it will start buying $60 billion a month in short-term treasury debt for the next six months. The amount is smaller than the last round of quantitative easing, which was $85 billion per month. Federal Reserve Chairman Powell said this is not quantitative easing, but rather a temporary adjustment in the size of the Fed’s balance sheet. However, the central bank said the buying would last “at least into the second quarter of next year,” opening the door to more asset purchases. U.S. equity markets rallied during all three rounds of quantitative easing and asset buying will buoy U.S. stocks going forward.

Economic data remains strong. The National Federation of Independent Business showed small business optimism is elevated at a reading of 101.8. The Job Openings and Labor Turnover Survey showed 7.1 million openings, still far outstripping the number of unemployed Americans. Initial claims for unemployment remained low at 210,000.

Inflation was subdued in September. Falling oil prices helped drag producer prices down 0.3 percent. Consumer inflation was modest with core CPI up 0.1 percent and headline inflation showing no increase.

The advance reading of University of Michigan’s consumer sentiment survey showed a spike in optimism this month. Analysts were looking for a dip to 92.5, but the index spiked to 96.0. Consumers anticipate faster wage gains and low inflation in the future. This reading is even more significant because the University of Michigan survey had been the weaker of the two most widely followed consumer confidence reports.

Fastenal (FAST) beat earnings expectations this week, sending the stock up 17.15 percent on Friday. Delta Air Lines (DAL) missed forecasts, but it slipped only 1.64 percent on the week amid a strong rally in transportation stocks.

The 10-year Treasury yield climbed to 1.75 percent as investor optimism increased on news of a trade deal and Federal Reserve bond buying. Along with rising stocks, the Federal Reserve’s balance sheet expansion also resulted in higher bond yields. iShares iBoxx High Yield Corporate Bond (HYG) advanced 0.38 percent on the week as the Fed’s asset buying should also suppress credit risk. iShares Barclays 20+ Year Treasury (TLT) sank 3.77 percent. Positive trade and central bank news prompted investors to sell gold. The metal fell 1.33 percent this week.

 

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