Weekly Market Analysis – 05 November 2018 BMO

Stocks Stage Rebound Following October Sell-Off

The S&P 500 staged a rebound effort this week, tallying a 2.4% weekly gain. The continued expectation that the market was due for a bounce-back after last month’s sell-off, compounded with mostly upbeat earnings and easing trade tensions underpinned the rally. As for the other major averages, the blue-chip Dow Jones Industrial Average gained 2.4%, the tech-sensitive Nasdaq Composite gained 2.7%, and the small-cap Russell 2000 gained 4.3%.

Cyclical sectors were largely the best-performing groups this week, with the lightly-weighted materials sector (+6.1%) and the heavily-weighted financials (+4.4%) sectors leading the advance. The consumer discretionary sector (+4.0%) also had a notable gain. On the downside, utilities was the only group to settle in the red, losing 0.6%.

U.S.-China trade tensions eased this week, with U.S. President Trump saying that he had a “long and very good conversation” with China’s President Xi, adding that the two leaders will be getting together at the upcoming G-20 summit in Argentina. There were some conflicting reports as to whether Mr. Trump has asked his cabinet to begin drafting a trade deal, but the president did say he thinks a deal will eventually be reached.

On the earnings front, Facebook‘s (FB) third quarter report was “good enough” to temper negativity surrounding the stock, helping to ease growth-related worries. Apple (AAPL), on the other hand, raised some red flags after forecasting softer-than-expected revenue guidance for the holiday quarter and announcing that it will no longer provide unit-sales data for the iPhone, iPad, and Mac.

Other notable companies to report earnings this week included Pfizer (PFE), Coca-Cola (KO), Chevron (CVX), Exxon Mobil (XOM), General Motors (GM), eBay (EBAY), T-Mobile US (TMUS), DowDuPont (DWDP), and Starbucks (SBUX), all of which beat estimates. Conversely, results from General Electric (GE), Kellogg (K), Spotify (SPOT), and Wayfair (W) came in below consensus.

In M&A news, IBM (IBM) acquired Red Hat (RHT) over the weekend for an all-cash offer of $190 per share; that represents a 63% premium over Red Hat’s October 26 closing price.

Highlighting this week’s batch of economic data was the Employment Situation report for October. Nonfarm payrolls increased by 250,000, higher than the Briefing.com consensus of 190,000, while average hourly earnings increased 0.2% as expected. The unemployment rate remained at a nearly 50-year low of 3.7%. The key takeaway from the report is that it is consistent with labor market trends that will keep the Federal Reserve on a tightening path. The U.S. Federal Reserve will be meeting next week, but no rate hike is expected until December.

Overseas, European and Asian stocks rose with Wall Street this week. In Germany, Chancellor Angela Merkel announced that she won’t be seeking re-election as head of the CDU, following disappointing results for her party in a regional election. Her plan, however, is to remain Chancellor until 2021. Meanwhile, the Bank of England and the Bank of Japan released their latest policy decisions, keeping interest rates unchanged.

(Economic Excerpts from Briefing.com)


Monday 29 October:

Spending outpaces income in September 

Personal income increased 0.2% in September (consensus +0.4%) while personal spending jumped 0.4% (consensus +0.4%). The PCE Price Index was up 0.1% (consensus +0.1%) while the core PCE Price Index, which excludes food and energy, increased 0.2% (consensus +0.1%).

The key takeaway from the report is the recognition that PCE price inflation decelerated to 2.0% year-over-year from 2.2% in August. Core PCE price inflation held steady at 2.0%. The inflation readings are on par with the Federal Reserve’s longer run target, yet they haven’t moved to such a degree that they are going to alter the Federal Reserve’s current policy stance, which involves an expectation for further gradual rate hikes.

Tuesday 30 October:

Consumer Confidence Picks Up in October; Highest since September 2000

The Conference Board’s Consumer Confidence Index, which revolves heavily around labor market and business conditions, increased to 137.9 in October (consensus 135.8) from a downwardly revised 135.3 (from 138.4) in September.   The October reading is the highest since September 2000.

The key takeaway from the report is that strong employment growth continues to underpin favorable consumer attitudes about present-day conditions and the outlook.

Wednesday 31 October:

Q3 Employment Cost Index Points to Rising Employment Costs

The third quarter employment cost index increased 0.8% (consensus +0.7) versus 0.6% in the second quarter.  Wages and salaries, which comprise about 70% of compensation costs, increased 0.9%, while benefit costs jumped 0.4%.

The key takeaway from the report is that it corroborates a trend of rising compensation costs for civilian workers that have been discussed by employers and which have kept the Federal Reserve on a tightening path.

October ADP above expectations; 227K vs consensus of 180K; September was 230K


Thursday 01 November:

Q3 Productivity shows a move in the right direction

Third quarter productivity increased 2.2% (consensus 2.1%) on the heels of an upwardly revised 3.0% (from 2.9%) in the second quarter. Unit labor costs rose 1.2% (consensus 1.1%) following a downwardly revised 1.1% decline (from -1.0%) in the second quarter.

The key takeaway from the report is that productivity is picking up. The third quarter increase was double the prior 10-quarter average increase of 1.1%. Faster productivity is a springboard for a better standard of living.

Unemployment claims remain on historically low side

Initial claims for the week ending October 27 decreased by 2,000 to 214,000 (consensus 213,000). Continuing claims for the week ending October 20 decreased by 7,000 to 1.631 million, which is the lowest level since July 28, 1973.

The key takeaway from the report is that the low level of initial and continuing claims remains indicative of a tight labor market.

ISM Manufacturing Index points to some deceleration in October

The ISM Manufacturing Index for October checked in at 57.7% (consensus 59.0%) versus 59.8% in September.  It is important to note that the September reading was close to an 18-year high.

The key takeaway from the report is that the pullback is most likely a natural slowing of activity following what has been an impressive acceleration in manufacturing activity on a national level.  That point notwithstanding, the deceleration in what has been one of the hottest sectors will feed into the peak-growth narrative that has been prominent of late.

Construction Spending flat in September

Total construction spending in September was little changed from August (consensus +0.2%) following an upwardly revised 0.8% increase (from +0.1%) in August.

The key takeaway from the report is the recognition that there was no growth in public construction spending in September.

Friday 02 November:

October Employment Report to Keep Fed on Tightening Path

The key takeaway from the October employment report is that it is consistent with labor market trends that will keep the Federal Reserve on a tightening path. Nonfarm payroll growth is strong, the labor force participation rate is increasing, and most importantly, average hourly earnings growth is trending higher at 3.1% year-over-year, its strongest pace since April 2009.

September Trade Deficit Widens, which Is More of the Same 

The Trade Balance Report for September showed a widening in the trade deficit to $54.0 billion (consensus -$53.4B) from a downwardly revised $53.3 billion (from -$53.2 billion) in August.

The key takeaway from the report is the same as last month in that it has yet to confirm the tariff actions are succeeding in cutting the trade deficit with China specifically and in general.


Friday 02 November
Apple, Conflicting Trade News Drag Market Lower

Stocks fell on Friday following conflicting U.S.-China trade reports and softer-than-expected sales guidance from Apple (AAPL 207.48). Futures rallied overnight on a Bloomberg report indicating U.S. President Trump asked his cabinet to draft a trade deal, but stocks eventually fell into negative territory after White House officials denied the report.

The S&P 500 lost 0.6%, the Dow Jones Industrial Average lost 0.4%, and the Nasdaq Composite lost 1.0%. Small caps outperformed, with the Russell 2000 adding 0.2%. All four major indices closed solidly higher for the week, adding between 2.4% and 4.3% apiece.

Director of the United States National Economic Council Larry Kudlow confirmed in a CNBC interview that the cabinet was not asked by President Trump to draw up a trade plan for China. Later, as stocks traded at session lows, President Trump reiterated his belief to reporters that the U.S. will reach a trade deal with China. This led stocks to cut their losses in late afternoon trading.

In earnings, Apple raised some red flags after forecasting weaker-than-expected sales for the holiday quarter and announcing it will no longer provide unit-sales data for the iPhone, iPad, and Mac moving forward. The company did beat both top and bottom line estimates though.

On the other hand, energy Dow components Exxon Mobil (XOM) and Chevron (CVX) rose after both reported above-consensus earnings. The energy sector showed relative strength, but still lost 0.1%. On a related note, WTI crude extended its recent downward trend, losing 0.9% to $63.20/bbl and reaching its lowest level since April.

Highlighting Friday’s batch of economic data was the influential Employment Situation report for October, which showed a nonfarm payrolls increase of 250,000, higher than the Briefing.com consensus of 190,000. Also, as expected, average hourly earnings increased 0.2%, and the unemployment rate remained at 3.7%.

In short, the strong jobs report validated labor market trends that will keep the Federal Reserve on a tightening path. The CME FedWatch Tool indicated a 80.7% chance of another Fed rate hike in December, up from a 74.5% chance the previous day. The Fed will meet next week, but no rate hike is expected.

Treasuries sold-off with equities on Friday, pushing yields notably higher across the curve. The Fed-sensitive 2-yr yield and benchmark 10-yr yield spiked seven basis points each to 2.91% and 3.21%, respectively, compared to 2.81% and 3.08% yields last week. Also, the U.S. Dollar Index added 0.2% to 96.48.

Market Internals – Friday 02 November 2018

Dollar: Overnight Loss Erased

The U.S. Dollar Index closed up 0.2% at 96.50 after reclaiming its overnight decline on Friday. The Dollar Index saw a continuation of Thursday’s retreat in overnight trade, as market participants focused on conciliatory-sounding remarks from President Trump and Chinese President Xi Jinping. China’s President Xi said that both he and President Trump want to expand China-US trade cooperation while a separate report indicated that President Trump asked his cabinet to draft a trade deal for the two countries. The Dollar Index hit a session low in Friday’s early-morning trade and rebounded shortly thereafter. The rebound took place after CNBC correspondent Eamon Javers reported that a senior administration official told him that “There is a long way to go” in negotiations. The Index accelerated its rebound after the release of another solid Employment Situation report. It is worth noting that National Economic Council Director Larry Kudlow appeared on CNBC in the early afternoon, saying it is not true that the cabinet was asked to draft a trade deal. The U.S. Dollar Index booked its third consecutive weekly advance, having climbed 0.2% since last Friday.

Bonds: 30-Yr Yield Hits Four-Year High

U.S. Treasuries ended the week on a lower note with the 30-yr yield rising to its highest level since July 2014. The overnight session saw an upbeat showing from equity markets in Asia as participants locked in on positive-sounding comments from the Chinese president and a Bloomberg report, which suggested that President Trump ordered his cabinet to prepare a draft for a trade deal with China. However, it wasn’t long before CNBC’s Washington correspondent Eamon Javers reported that a senior administration official told him that “There is a long way to go” in negotiations with China. That revelation was followed by the release of a solid Employment Situation report for October, which stayed true to the trend observed in recent years. Treasuries spent the session in a steady retreat while the U.S. Dollar Index (96.55, +0.28) rebounded off its overnight low as optimism about an immediate relief to U.S.-China tensions dissipated. The Dollar Index jumped to a fresh high in the afternoon, extending its advance after National Economic Council Director Larry Kudlow told CNBC it is not true that the cabinet was asked to draft a trade deal. Treasuries of all tenors finished the session on their lows.

The yield curve rose across the board. The spread between the 5s10s was unchanged at 17bps from 17bps the previous week while the 10s30s maintained its 24bps spread from 24bps the previous week. 


The Bloomberg Commodity Index settled at 83.88, lower than 85.00 the previous week.

WTI oil fell, settling the week at $63.14. The spread between WTI and Brent narrowed to $9.69 from $10.03 the previous week as Brent settled at $72.83 p/b.

EIA petroleum data for the week ended October 26

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.2 mln barrels from the previous week. At 426.0 mln barrels, U.S. crude oil inventories are about 2% above the five year average for this time of year. Total motor gasoline inventories decreased by 3.2 mln barrels last week and are about 6% above the five year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased by 4.1 mln barrels last week and are about 5% below the five year average for this time of year. Propane/propylene inventories increased by 1.0 mln barrels last week and are about 3% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 6.4 mln barrels last week.

Natural gas inventory showed a build of 48 bcf vs a build of 58 bcf in the prior week. Working gas in storage was 3,143 Bcf as of Friday, October 26, 2018, according to EIA estimates. This represents a net increase of 48 Bcf from the previous week. Stocks were 623 Bcf less than last year at this time and 638 Bcf below the five-year average of 3,781 Bcf. At 3,143 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased by -1 to 1067 following last week’s increase of 1.

Metals: Gold Drops, Copper Continues Strength

Agriculture: Grains Bounce


Week 45 (November 05 to 09)

According to our 5, 10 and 15 year seasonal models;

Benchmarks Indices (21 year average) for wk45:

Week 45 Key Economic Dates

For the coming week, the Fed will decide on monetary policy. Other important releases for the US: ISM Non-Manufacturing PMI, preliminary Michigan consumer sentiment, and producer prices.

Elsewhere: UK Q3 GDP growth; China foreign trade and inflation; and RBA interest rate decision will also be in the spotlight. Investors will also react to the US midterm elections and President Xi Jinping speech.

Mon 05 November

Tue 06 November

Wed 07 November

Thu 08 November

Fri 09 November




“I remain bearish (but less so now) and heavily hedged on my longs. The coming week is only the second of three of the busiest weeks in earnings season. If you’re thinking of turning Bear now, you might just be a tad late. Stay safe and stay out – never chase the trend.”

That turned out to be pretty sound advice. Now that the major benchmarks are above their respective 200DSMAs, let’s see if they are able to stay above it in the coming two weeks given that the end of this coming week is traditionally quite bearish. I might start lightening my hedges and prepare for the annual year-end bull run if this market doesn’t fall apart after the FOMC Policy Meeting.

Happy Hunting!


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