Weekly Market Analysis – 24 December 2018 BMO

WEEK IN REVIEW – 17 to 21 DECEMBER 2018 :
S&P 500 Sets New Yearly Low amid Continued Uncertainty

The S&P 500 dropped 7.1% this week, setting a new yearly low at 2408.12, amid ongoing concerns over economic growth, trade, politics, and fear the Federal Reserve could be on course for making a policy mistake. This week’s losses brought the benchmark index’s decline to 12.5% in December.

The Dow Jones Industrial Average (-6.9%), Nasdaq Composite (-8.4%), and Russell 2000 (-8.4%) also extended monthly losses to 12.1%, 13.6%, and 15.7%.

Losses were widespread with all 11 S&P 500 sectors posting weekly losses, ranging from 4.5% (utilities) to 9.0% (energy) as there was a broad-based de-risking effort.

The S&P 500 would test its February low (2532.69) three times this week: twice before the Fed’s decision and once after the Fed’s decision.

The first two re-tests invited some late buying interest that enabled stocks to close off their worst levels in their respective sessions. The third test, however, failed on Wednesday due to a sense of disappointment that the Federal Open Market Committee, and Fed Chair Powell, didn’t deliver on the market’s wishes for a more dovish-sounding perspective regarding the interest rate outlook for 2019 and the Federal Reserve’s balance sheet management.

In terms of the Fed decision, the target range for the fed funds rate was increased by 25 basis points to 2.25% to 2.50%, as expected, and the so-called dot-plot was revised to show a median projection for two rate hikes in 2019, versus three previously.

Fed Chair Powell irked the market during his press conference when he said (1) policy does not need to be accommodative now and that he doesn’t believe the current policy is restrictive and (2) he does not see the Fed altering its approach to balance sheet normalization and sees the preferred policy method being use of the fed funds rate.

New York Fed President John Williams offered a seemingly more dovish-minded perspective on Friday when he said in a CNBC interview that the Fed is listening to the market and that a balance sheet runoff is not “inflexible.” Those remarks triggered a rally effort, but true to recent form, there was selling into strength.

Some other nettlesome elements that weighed on investor sentiment this week included (1) the possibility of a partial government shutdown due to disagreements over a funding request for a border wall (2) a bothersome sense that the U.S. and China aren’t going to be able to reach a trade agreement on structural issues in their prescribed 90-day window (3) the understanding that credit markets appear to be anticipating a growth slowdown due to tighter monetary policy and (4) falling oil ($45.59/bbl, -$5.50, -10.7%) and copper ($2.67/lb, -$0.09, -3.4%) prices that fed into growth concerns.

Uncertainty, and the inability to sustain any rebound effort from short-term oversold conditions, ultimately held back buying interest and led to a flight to safety in U.S. Treasuries. The Fed-sensitive 2-yr yield and benchmark 10-yr yield dropped 10 basis points each to 2.63% and 2.79%.

(Economic Excerpts from Briefing.com)

Tuesday 18 December:

Housing starts and permits lack single-unit boost in November

The Housing Starts and Building Permits Report for November wasn’t as strong as the headline figures suggested, as it featured little to no growth in both permits and starts for single-family units.

Total starts increased 3.2% to a seasonally adjusted annual rate of 1.256 million units (consensus 1.230 million), yet starts for single-family units declined 4.6% to 824,000, which is the lowest since May 2017. Total permits increased 5.0% to a seasonally adjusted annual rate of 1.328 million (consensus 1.270 million), yet permits for single-family units were up just 0.1% to 848,000.

The key takeaway from the report is that it substantiates the weakening levels of homebuilder confidence and is a reflection of the impact rising interest rates are having on single-family construction activity.

Wednesday 19 December:

Existing Home Sales Exceed November Expectations

Existing home sales increased 1.9% month-over-month in November to a seasonally adjusted annual rate of 5.32 million (consensus 5.20 million). Total sales were 7.0% lower than the same period a year ago.

The key takeaway from the report is that while sales have now increased for two consecutive months, the trajectory remains challenged by higher mortgage rates and limited affordability.

Thursday 20 December:

December Philadelphia Fed 9.4 vs consensus of 17.5; November was 12.9

Initial claims running low, bolstering December nonfarm payroll expectations 

Initial claims for the week ending December 15 increased by 8,000 to 214,000 (consensus 221,000). Continuing claims for the week ending December 8 increased by 27,000 to 1.688 million.

The key takeaway from the report is that it covers the period in which the survey for the December employment report is conducted. Accordingly, the low level of initial claims should translate into an expectation for solid nonfarm payroll growth in December.

Leading Indicators Increase Modestly in November

The Conference Board’s Leading Economic Index increased 0.2% in November (consensus 0.1%) after decreasing a revised 0.3% (from +0.1%) in October.

The key takeaway from the report is that the Conference Board expects the pace of economic growth to continue moderating in the second half of 2019.

Friday 14 December:

Durable goods orders data disappoints in November

Durable goods orders increased 0.8% in November (consensus 1.7%) after an upwardly revised 4.3% decline (from -4.4%) in October. Excluding transportation, orders declined 0.3% (consensus +0.3%) after increasing an upwardly revised 0.4% (from 0.1%) in October.

The key takeaway from the report is that business investment was weak, evidenced by the 0.6% decline in nondefense capital goods orders excluding aircraft. Moreover, a 0.1% decline in shipments of those same goods will be accounted for as a negative input in Q4 GDP forecasts.

Q3 GDP sees small downward revision with third estimate

The third estimate for Q3 GDP showed a downward revision to 3.4% from 3.5% (consensus 3.5%) and an upward revision to the GDP Price Deflator to 1.8% from 1.7% (Briefing.com consensus 1.7%).

The key takeaway from the report was the same as before, which is that real final sales grew at their slowest rate since the fourth quarter of 2016.

November sees boost in personal income and spending 

Personal income increased 0.2% month-over-month in November (consensus 0.3%). Personal spending rose 0.4% (consensus 0.3%).  The PCE Price Index increased 0.1% (consensus 0.0%) while the core PCE Price Index, which excludes food and energy, also increased 0.1% (consensus 0.2%).

The key takeaway from the report is that it showed PCE inflation continues to run below the Federal Reserve’s longer-run target of 2.0%, which could raise the market’s angst level about the Fed being on course to make a policy mistake with further tightening action.

Consumer sentiment holds up in December despite stock market losses 

The University of Michigan Index of Consumer Sentiment checked in at 98.3 with the final reading for December (consensus 97.5) versus a preliminary reading of 97.5 and the final reading of 97.5 for November.  That left the 2018 average at 98.4, which was the best year since 2000.

The key takeaway from the report is that sentiment wasn’t dented with the stock market’s losses; however, expectations were tempered a bit amid burgeoning concerns about income and job prospects.





Wednesday 19 December 2019

FOMC raises FFR 25 bps to 2.25-2.50% (2.375% midpoint); signals two rate hikes in 2019

Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.


Friday 21 December
Stocks Tumble in Risk-Reducing Efforts

The S&P 500 fell 2.1% on Friday, as uncertainty surrounding a host of issues, which included politics and trade, continued to provide a justification to reduce risk. Friday’s decline pushed the benchmark index to a new yearly low of 2408.12 and a weekly loss of 7.1%.

The Dow Jones Industrial Average (-1.8%), the Nasdaq Composite (-3.0%), and the Russell 2000 (-2.6%) also posted considerable declines to cap weekly losses at 6.9%, 8.4%, and 8.4%, respectively.

The S&P 500 had climbed to session highs in morning action (+1.5%) amid some market-soothing commentary from New York Fed President John Williams. Specifically, Mr. Williams indicated that the Fed is listening to the market and that the path of balance sheet runoff in 2019 is not “inflexible.”

That recovery effort, however, was yet again met with selling resistance that drove the market further into negative territory. Disappointment in the inability to sustain a rebound effort from short-term oversold conditions effectively led to a buyers strike that weighed heavily on the indices.

Some discouraging headlines that compounded risk-reduction efforts included (1) the threat of a partial government shutdown due to disagreement over funding for a border wall, and (2) a late-day report that Director of the White House National Trade Council Peter Navarro told Nikkei that an agreement with China in 90 days will be difficult to attain.

All 11 S&P 500 sectors finished in negative territory with the communication services (-3.1%), information technology (-3.0%), and consumer discretionary (-2.6%) groups leading the retreat.

Dow component Nike (NKE), for its part, was the best-performing stock in the S&P 500 after it released a strong earnings report and issued an encouraging FY19 currency neutral revenue growth outlook.

U.S. Treasuries remained resistant to selling pressure amid the equity sell-off. The 2-yr yield dropped four basis points to 2.63%, and the 10-yr yield was unchanged at 2.79%.

There are no companies we cover scheduled to report earnings next week. The market will be open until 13:00 ET on Monday, December 24 and will be closed for Christmas on Tuesday, December 25.

Market Internals – Friday 21 December 2018


The U.S. Dollar closed lower for the week at $96.95 from $97.45 after nearing nearing the yearly high the previous week.


US Treasuries remained resistant to selling pressure as stocks continued to be sold, prompting a continuation of flight-to-safety trades this week that helped drive yields down between nine and 11 basis points for securities ranging from the 2-yr note to the 30-yr bond.  The bulk of today’s buying interest was concentrated in shorter-dated instruments, which transpired as talk surfaced that the U.S government looks set for a partial shutdown at midnight tonight due to a political fight over funding for a border wall.  The S&P 500, up as much as 1.5% in early action, was down 2.0% as of this post.

The yield curve flattened to the downside. The spread on the 2s5s is +1bps  after being flat the previous weekThe spread between the 5s10s narrowed to 15bps from 16bps the previous week while the 10s30s narrowed to 24bps from 25bps the previous week. The 2-30 spread has narrowed to 40bps from 41bps a week ago while the spread that matters most, the 2s10s, remained unchanged 16bps from 16bps the previous week.

The spread that really matters most to me, is the one between the Fed Fund Rate and the 10year yield which has narrowed considerably in the last week. With the Fed raising the benchmark rate 25bps to 2.50% and the 10year falling 10bps to 2.79%, the FFR/10yr spread is now at its narrowest since December 2007 at 29bps.

Read up on the effects of the FFR/10yr spread here: The Fed Fund Rate & The Market 2016


The Bloomberg Commodity Index settled at 78.70, lower than 81.27 the previous week as Grains and Energy lost ground.

WTI oil closed at $45.59 p/b, lower than the week before at $51.20. The spread between WTI and Brent narrowed to $8.23 from $9.08 the previous week as Brent settled at $53.82 p/b.

EIA petroleum data for the week ended December 14

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 0.5 million barrels from the previous week. At 441.5 million barrels, U.S. crude oil inventories are about 7% above the five year average for this time of year. Total motor gasoline inventories increased by 1.8 million barrels last week and are about 3% above the five year average for this time of year. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories decreased by 4.2 million barrels last week and are about 11% below the five year average for this time of year. Propane/propylene inventories decreased by 3.3 million barrels last week and are about 6% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 10.3 million barrels last week.

Natural gas inventory showed a draw of 141 bcf vs a draw of 77 bcf in the prior week. Working gas in storage was 2,773 Bcf as of Friday, December 14, 2018, according to EIA estimates. This represents a net decrease of 141 Bcf from the previous week. Stocks were 697 Bcf less than last year at this time and 720 Bcf below the five-year average of 3,493 Bcf. At 2,773 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased by +9 to 1080 following last week’s decrease of -4.

Metals: Precious Gains

Agriculture:  Grains sell off


Week 52 (December 24 to 28)

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

Benchmarks Indices (21 year average) for wk52:

Week 52 Key Economic Dates

The coming week will be light on data given the holiday season.

Mon 24 December

Tue 25 December

Wed 26 December

Thu 27 December

Fri 28 December



I reckon there’s going to be fireworks … and it won’t be because Santa is coming. On the contrary, the market seems to be scaring Santa away this Christmas.

The DOW needs to recover 2,274 points to close 2018 in the black while the S&P500 requires 257 points with only four-and-a-half trading days remaining. That’s a tall order given that the DOW needs to recover an average of 501 points (+2.23%) a day over the remaining 4.5 days. That is an even taller order if you consider that the last week of the trading year always has the lowest trading volumes. With the yield curve flattening, the dollar weakening and crude prices falling, this will crush any remaining confidence in risk for the coming year.

Any talk of a Santa Claus Rally seems to have all but faded into oblivion. The only thing rising quietly is Gold … and those who know what that means are counting the months downs. 

I am holding to the opinion that this is still only a correction, the one that was long overdue and expected. All the talk of an economic slowdown or recession have been nothing more than speculative projections by Wall Street and some cautious corporations.

Cut through all that noise and you still have a lofty U.S. economy that is still gainfully employed that is still recording growth that is still not dangerously inflated nor deflated that is still high on consumer spending and confidence that is still manufacturing and producing at normal levels. There are no obvious signs of economic weakness that would say that a recession is near.

There is, however, the possibility that the market could continue falling to new lows. That could have a telling effect on corporate performance and earnings come Q1 Earnings Season for Q4 results starting in three weeks’ time. Should that happen, we then could have the catalyst for the next recession. 

But for now, the numbers don’t say it. For now, this is just another correction.

Happy Hunting!



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