Weekly Market Analysis – 10 December 2018 BMO

Global Growth Concerns Pull Stocks Lower

The S&P 500 fell 4.6% this week, as global growth concerns were exacerbated by negative developments regarding U.S-China trade negotiations and the continued flattening of the U.S. Treasury yield curve. The Dow Jones Industrial Average lost 4.5%, the Nasdaq Composite lost 4.9%, and the Russell 2000 lost 5.6%.

Investors breathed a fleeting sigh relief that trade relations between the U.S. and China did not worsen over the weekend after the two countries agreed to suspend further tariff actions for 90 days to allow more time for trade discussions. Despite President Trump’s optimism, the market’s optimism quickly waned on the supposition that a March 1 deadline to resolve major trading issues won’t be sufficient time to work out major trade issues that have been in place for years. Furthermore, the specter of increasing the tariff rate to 25% (from 10%) on $200 billion of Chinese goods should an acceptable deal not be reached weighed on investors’ minds.

In addition, the news of the arrest of Huawei Technologies’ CFO Meng Wanzhou heightened these burgeoning trade concerns. Ms. Meng was arrested Dec. 1 in Canada amid allegations that the company violated U.S. trade sanctions on Iran. Her arrest invited worries about trade negotiations going awry in the 90-day window and potential retaliation against U.S. companies doing business in/with China.

Economic growth concerns were cast into the spotlight by a decisive curve-flattening trade in the Treasury market that featured some inversions on the short end. The 2-yr yield (2.70%) and 3-yr yield (2.71%) closed higher than the yield on the 5-yr Treasury note (2.69%) this week.

Also, the difference between the 2-yr and 10-yr yields narrowed to its slimmest margin since 2007. Specifically, the 2-yr yield lost 11 basis points to 2.70%, and the 10-yr yield lost 16 basis points to 2.85%. Those moves were exacerbated by a “pain trade,” as short sellers expecting higher rates were compelled to cover their bearish bets.

In a broader context, concerns over future economic growth drove concerns about future earnings growth. That fueled some of this week’s selling interest, which completely unwound the 4.9% gain for the S&P 500 from the prior week at Friday’s low. 

Notably, that was the case despite there being one less day of trading.  The market was closed Wednesday in recognition of the national day of mourning for President George H.W. Bush.

The worst-performing sectors this week were the financials (-7.1%), industrials (-6.3%), materials (-5.2%), information technology (-5.1%), and health care (-4.6%) sectors.  The only two sectors that escaped the week with a gain were the utilities (+1.3%) and real estate (+0.3%) sectors.

The rate-sensitive financial sector was undermined by the flattening yield curve, which raised concerns about a compression in net interest margins. Regional banks were notable laggards as worries about lower mortgage loan demand stemmed from home builder Toll Brothers (TOL) acknowledging that it saw a moderation in demand in its fiscal fourth quarter ended Oct. 31 and that it saw the market soften further in November. The SPDR S&P Regional Bank ETF (KRE) fell 7.2% this week.

Transport stocks, in particular, weighed on the trade-sensitive industrial sector. The Dow Jones Transportation Average dropped 8.0% this week. American Airlines (AAL) struggled with a steep 16.4% loss this week.

Apple (AAPL) conceded more losses this week, as it dragged on the tech space. Apple has retreated over 20.0% since releasing its quarterly report in October and has remained a signpost of the ongoing effort to liquidate/reduce exposure to this widely-owned sector, which is still the market’s most heavily-weighted sector.

The energy sector (-3.1%) was down for the week, yet it outperformed the broader market, helped by a 3.1% bump in oil prices to $52.52 per barrel.

Energy stocks pared gains on Friday after OPEC+ producers agreed to a production cut of 1.2 million barrels per day to address weakening oil prices. Russia was a party to the proposed production cuts; meanwhile, Iran will reportedly be exempt from the production cut requirements.

On a related note, Qatar, in a surprise move, announced plans to withdraw from OPEC to focus on gas production. Qatar has been a member of OPEC since 1961.

Separately, Atlanta Fed President Bostic (FOMC voter) said he thinks the fed funds rate is within shouting distance of neutral, which followed previous remarks from Dallas Fed President Kaplan (non-FOMC voter) who also suggested the fed funds rate is a little bit below neutral. A Wall Street Journal report also suggested that the Federal Reserve might be more cautious-minded about raising interest rates following its December FOMC meeting.

The November Employment Situation Report on Friday seemingly helped substantiate that view. It showed nonfarm payrolls increasing a weaker than expected 155,000 and average hourly earnings increasing 0.2%, which left them up 3.1% year-over-year, unchanged from October.  In other words, the wage growth acceleration the Federal Reserve has been bracing for was missing.

Overseas, global markets finished the week with large losses as well. Germany’s DAX (-4.2%) led the European retreat and Japan’s Nikkei (-3.0%) led the decline in Asia.

(Economic Excerpts from Briefing.com)

Monday 03 December:

ISM Manufacturing Index Steps Up in November 

The ISM Manufacturing Index for November checked in at 59.3% (consensus 57.2%) versus 57.7% for October, led by strength in the New Orders Index.

The key takeaway from the report is that it reflects an acceleration in national manufacturing activity at a time when concerns have been picking up about a general growth slowdown.  Accordingly, it can help mitigate some of the slowdown concerns and potentially foster an improved outlook for Q4 GDP growth.

Construction Spending Slips Again in October 

Total construction spending declined 0.1% in October (consensus +0.3%) following a downwardly revised 0.1% decline (from 0.0%) in September.

The key takeaway from the report is that the weakness was driven by a decline in new single-family construction, providing further evidence of the softening in housing market activity.

Tuesday 04 December:

Fed Beige Book Meeting

Thursday 06 December:

Trade Deficit Continues to Widen in October

The U.S. trade deficit was $55.5 billion in October (consensus -$54.7 billion) versus a downwardly revised $54.6 billion (from -$54.0 billion) in September.

The key takeaway from the report is that it doesn’t reflect any improvement in the U.S trade deficit despite the tariff actions. The goods and services deficit has increased by $51.3 billion year-to-date, or 11.4%, from the same period in 2017.

Initial Claims Down, but Turn in Down Cycle Emerging

Initial jobless claims for the week ending December 1 decreased by 4,000 to 231,000 (consensus 225,000). Continuing claims for the week ending Nov. 24 decreased by 74,000 to 1.631 million.

The key takeaway from the report is that initial claims, while down in the latest week, are starting to pick up in a move that suggests the low for this cycle has been reached.

Third Quarter Productivity Edges Higher with Revision

Nonfarm business sector labor productivity for the third quarter was revised to 2.3% (consensus 2.2%) from 2.2%. Unit labor cost growth was revised to 0.9% (Briefing.com consensus 1.2%) from 1.2%.

The key takeaway from the report is that it points to fairly subdued labor costs in the third quarter, which could contribute to a willingness on the part of the Federal Reserve to be more gradual on its rate-hike path.

ISM Non-Manufacturing Index Pushes Higher in November

The ISM Non-Manufacturing Index rose to 60.7% in November (consensus 59.0%) from 60.3% in October.  The November reading was the second-highest reading this year.

The key takeaway from the report is that the services-providing sector, which accounts for a much larger slice of economic activity than the manufacturing sector does, remains in a healthy and fairly vibrant state.

Factory Orders Slump in October; Business Investment Flat

Factory orders declined 2.1% in October (consensus -2.0%) following a downwardly revised 0.2% increase (from 0.7%) in September. Excluding transportation, orders were up 0.3%.

The key takeaway from the report is that it shows a surprising lack of business investment in the face of business-friendly fiscal stimulus measures.

Friday 07 December:

November Employment Report Soothes Some Rate-Hike Concerns 

November nonfarm payroll growth was a little light of expectations, but key for the market was the recognition that average hourly earnings were up 0.2% month-over-month. The latter resulted in a year-over-year increase of 3.1%, which was unchanged for the 12-month period ending in October.

The key takeaway from the report is that the wage acceleration the Federal Reserve has been bracing for was missing. That won’t likely keep the Federal Reserve from raising the target range for the fed funds rate at its December FOMC meeting, yet it’s the type of data point that could lead the Federal Reserve to be more cautious-minded about raising rates after that.

Consumer Sentiment Unchanged — and Still High

The preliminary University of Michigan Index of Consumer Sentiment for December checked in at 97.5 (consensus 96.8), unchanged from the final reading for November and in-line with the two-year average from January 2017 to December 2018.

The key takeaway from the report is the observation that consumer attitudes around job and wage prospects are key to the consumer spending outlook and that some caution on that front may now be warranted as consumers recognize the goal of raising interest rates is to slow the pace of economic growth.

Wholesale Inventories Up Again in October; Sales Dip 

Wholesale inventories increased 0.8% in October (consensus 0.7%) on top of  an upwardly revised 0.7% increase (from 0.4%) in September. Wholesale sales were down  0.2% following a downwardly revised 0.1% increase (from 0.2%) in September.

The key takeaway from the report is that inventory growth exceeded sales growth, which is a dynamic that could give way to lower pricing.

Consumer Credit Expansion Ramps Up in October

Total outstanding consumer credit increased by $25.4 billion in October after increasing an upwardly revised $11.6 billion (from $11.0 billion) in September.

The key takeaway from the report is that the healthy expansion in consumer credit is a good portent for consumer spending activity.


International Key Economic Data


Friday 07 December
Stocks End Losing Week on Downbeat Note

The S&P 500 lost 2.3% on Friday to close a losing week (-4.6%) on a sour note. The major averages fumbled an early morning rally effort and steadily retreated throughout the day to finish near session lows.

The Dow Jones Industrial Average lost 2.2%, the Nasdaq Composite lost 3.1%, and the Russell 2000 lost 2.0%. For the week, those indices lost 4.5%, 4.9%, and 5.6%, respectively.

The inability to sustain an early rally effort following Thursday’s strong rebound, and a generally supportive employment report, raised some concern that the week’s down leg had yet to run its course. Volatile price action also undercut investor sentiment and tempered confidence in buy-the-dip efforts.

Within the S&P 500, the information technology (-3.5%), consumer discretionary (-3.1%), and industrial (-2.6%) sectors underperformed the broader market.

Apple’s (AAPL) poor performance within the tech space was reflective of the ongoing effort to liquidate/reduce exposure to the market’s most heavily-weighted group. The sector’s non-response to Broadcom’s (AVGO) upbeat earnings report was also indicative of the negative sentiment hanging over the sector. The tech sector lost 5.1% this week and is now down 14.6% this quarter.

Chip stocks also struggled with the Philadelphia Semiconductor Index losing 3.7%. NVIDIA (NVDA) underperformed with a notable loss of 6.8%.

Within the industrial sector, transport stocks were one of the most-heavily hit groups on Friday with the Dow Jones Transportation Average losing 3.9%, as growth concerns and an uptick in oil prices fed selling efforts. American Airlines (AAL) and FedEx (FDX) were notable laggards with steep losses of 9.1% and 6.1%, respectively.

On the other hand, the utilities (+0.4%) group was the only sector to finish in positive territory on Friday. The energy sector (-0.6%) also showed relative strength.

Looking at energy, OPEC+ producers agreed to a production cut of 1.2 million barrels per day to address weakening oil prices. Russia was a party to the proposed production cuts, yet Iran is reportedly exempt from the production cut requirements. WTI crude rose 2.0% to $52.60/bbl, although it gave up a good chunk of its gains.

In earnings, lululemon athletica (LULU) and Ulta Beauty (ULTA) fell 13.4% and 13.1%, respectively, after releasing their earnings reports. Lululemon sold-off despite beating top and bottom line estimates.  Ulta tumbled after the company issued Q4 guidance below consensus.

U.S. Treasuries extended their recent climb, pushing yields lower, amid the equity sell-off. Friday’s gains were led by the front end, which responded favorably to the November employment report and a contention from St. Louis Fed President Bullard (a 2019 FOMC voter) that the Fed could consider delaying a rate hike at the December FOMC meeting due to the narrowed yield curve.

Specifically, the 2-yr yield fell seven basis points to 2.70%, and the 10-yr yield fell two basis points to 2.85%. For the week, the 2-yr yield dropped 11 basis points, and the 10-yr yield dropped 16 basis points. Meanwhile, the U.S. Dollar Index decreased 0.2% to 96.92 on Friday.

Separately, the CBOE Volatility Index (VIX), which is often referred to as Wall Street’s “fear gauge,” rose 9.6% to 23.23. For the week, the VIX climbed nearly 30.0%.

Market Internals – Friday 07 December 2018

Dollar: Slump Continues

The U.S. Dollar decreased 0.0475 or 0.05% to 96.71 on Friday December 7 from 96.7957 in the previous trading session.

Bonds: Shorter Maturities Invert

U.S. Treasuries wrapped up a winning week with more gains as the stock market continued to flounder, trade concerns continued to fester, and expectations for an overly aggressive Federal Reserve in 2019 continued to fall by the wayside.  Today’s gains were led by the front end, which responded favorably to the November employment report and a contention from St. Louis Fed President Bullard (a 2019 FOMC voter) that the Fed could consider delaying a rate hike at the December FOMC meeting due to the narrowed yield curve.  The 10-2 spread widened five basis points today to 15 basis points while 2-yr and 3-yr yields continued to trade above the 5-yr yield.  The S&P 500 was down 2.6% as of this post while the Nasdaq Composite was down 3.3%.  The weakness there continued to drive a flight-to-safety in the Treasury market.  Yields for securities ranging from the 2-yr note to the 30-yr bond dropped between 11 and 17 basis points this week.

The yield curve inverted on the shorter maturities for the first time since 2006 as longer maturities’ yields fell against the 2-year yield. The spread between the 2s5s inverted to -1bp from 3bps the previous week. The spread between the 5s10s tightened to 16bps from 17bps the previous week while the 10s30s narrowed to 29bps from 30bps the previous week.

The spread that investors monitor for a true inversion of the yield curve, the 2-10 spread, has narrowed to 15bps from 23bps a week ago.

The next warning sign that this market is ready for a more significant downside will be the convergence of the 10yr yield against the Fed Funds Rate. You can read all about it in an older article here: The Fed Fund Rate, The Market & 2016 (Original article titled “Riding The Rate” was published in the Business Times in 2007 and republished in BTInvest in the Business Times on April 2015 .)


The Bloomberg Commodity Index settled at 83.49, higher than 82.56 the previous week as Energy, Precious and Grains gained.

WTI oil closed at 52.61, higher than the week before at $50.93 after OPEC+ producers agreed to a production cut of 1.2 million barrels per day to address weakening oil prices. The spread between WTI and Brent widened to $9.06 from $7.78 the previous week as Brent settled at $61.67 p/b.

EIA petroleum data for the week ended November 30

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 7.3 mln barrels from the previous week. At 443.2 mln barrels, U.S. crude oil inventories are about 6% above the five year average for this time of year. Total motor gasoline inventories increased by 1.7 mln barrels last week and are about 4% above the five year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 3.8 mln barrels last week and are about 5% below the five year average for this time of year. Propane/propylene inventories decreased by 1.3 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 8.3 mln barrels last week.

Natural gas inventory showed a draw of 63 bcf vs a draw of 59 bcf in the prior week. Working gas in storage was 2,991 Bcf as of Friday, November 30, 2018, according to EIA estimates. This represents a net decrease of 63 Bcf from the previous week. Stocks were 704 Bcf less than last year at this time and 725 Bcf below the five-year average of 3,716 Bcf. At 2,991 Bcf, total working gas is below the five-year historical range

Baker Hughes total U.S. rig count decreased by -1 to 1075 following last week’s decrease of -3.

Metals: Precious Recovers, Copper Consolidates

Agriculture: Grains Gain Again


Week 50 (December 10 to 14)

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

Benchmarks Indices (21 year average) for wk50:

Week 50 Key Economic Dates

In the coming week …

Sun 09 December

Mon 10 December

Tue 11 December

Wed 12 December

Thu 13 December

Fri 14 December



The big news last week was the inversion of the shorter end (2yr, 3yr and 5yr) of the yield curve. If that rocked the DOW by 800 points (3%), imagine what will happen when the key benchmark 10yr yield inverts against the 2yr.

As of Friday’s close, the S&P500 and Russel1000 closed below their 200/50DSMA Death Crosses to join the NASDAQ and Russel2000 that crossed below their own Death Crosses a week earlier and the Transports that crossed below two Friday’s ago. 

The DOW (Industrials) has yet to get its Death Cross but remains below its 200DSMA above its 24,200 support. At this rate, it is likely to happen before December Expiration Friday (21 December) or even by this coming week if it breaches the 24,200 support.

All the benchmarks are negative for the year including the Transports and Russels.

Happy Hunting!



Date: 20th Dec 2018, Thursday
Time: 07:00PM to 10:00PM
(Registration starts at 06:30PM)


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