U.S. stocks reached new record highs following the October jobs report which indicated that the economy added more jobs than expected. That is positive despite potential impact from significant events such as the GM worker strike and the loss of temporary U.S. Census jobs. In an expected move, the U.S. Federal Reserve cut interest rates for the third time this year. They followed the announcement which indicated a pause in the lowering of rates in order to react more closely to changing economic tides. The third-quarter GDP estimate slowed last week from 2.0% to 1.9%, but possibly showed that several risks have lessened. Those include the lowering of U.S./China trade tensions, the ongoing uncertainty of the Brexit situation, and manufacturing weakness, which seems to have leveled. Analysts agree that the U.S. economy is pretty solid, supported by the three legs that have been driving growth: a strong labor market, rising corporate earnings, and interest rates that remain in check.
The data seems to support that there is still good support fueling the stock market. Most evident is the fact that stock prices rose 1.5% last week and hit a new record high. The rise was supported by what is seen as slowing economic and corporate data that remains positive and still surpassed market expectations. There are four growth trends that appeared in the recent data that should help offset risks from slowing domestic and global growth, as well as trade uncertainty. They will likely keep the bull market in full swing, but also slower than in the previous term.
The trends to watch are:
A healthy labor market supports consumer spending – The economy added 128,000 jobs in October, well above the consensus estimate and stronger than the 100,000 jobs needed to support new entrants into the workforce each month. Average hourly earnings grew by 3% from a year ago, besting consumer-price inflation over the same time period.
GDP growth is slowing but still positive driven by consumers – GDP data released last week showed that the economy grew by an estimated 1.9% in the period from July through September, slightly lower than the 2% pace posted in the previous three months. Consumers continue to show resilience in the face of these concerns.
The Fed monetary policy is well positioned for the bull market – The Federal Reserve delivered on a third straight reduction in benchmark interest rates, reducing the federal funds target to 1.5%-1.75% from 1.75% -2.0%. By stating that monetary policy was “in a good place,” the Federal Reserve chair signaled a pause in future rate cuts to assess the state of the economy.
Positive corporate earnings are supporting growth in share process with added volatility – The corporate sector is also showing earnings growth. Approximately 80% of firms that have reported third-quarter earnings so far have beat analysts’ estimates. Corporate results thus far have also reinforced our view that earnings will continue to grow at a measured pace.
Metals and Mining
Gold prices fell slightly on Friday based on stronger data from China, which pushed investors’ risk tolerance. Market watchers are also awaiting employment data from the US, which should give some perspective on its trade dispute with China and its impact on the US economy. Despite the downtrend, gold has support from trade uncertainties and the recent interest rate cut by the US Fed. Analysts say that shrinking interest rates and ongoing trade war concerns will help prop up gold in the medium to long term. Despite being down at the end of the week, gold was set for a weekly gain. Silver once again followed gold’s direction and dipped slightly. It continues to trade over the US$18 per ounce level. There is strong industry support for silver set against the current political and economic climate. With other precious metals, platinum was relatively flat on Friday, and hung around the US$900 per ounce level. It is trending upward for the most part based on gold’s momentum. Palladium was again the precious metal leader, hitting an all-time high of US$1,824.50 per ounce during Wednesday’s session. Its gains have been largely attributed to stricter environmental regulations surrounding car emissions and the demand that flows from them.
Energy and Oil
On Friday morning oil received a jolt on unexpectedly positive manufacturing data from China and a continued rig count collapse. Neither of these put to rest concerns about an economic slowdown. It appears that economic uncertainty will dominate the oil market narrative, and markets will hinge on the next movements in the ongoing trade war between the U.S. and China. Brent crude climbed back above $62/barrel in intraday trade toward the end of October, before heading back down again. That was based mostly on growing concerns about weak Chinese industrial growth, following data showing Chinese industrial company profits had fallen for the second month in a row. Earlier data put India’s oil imports in September at three-year lows. India and China have accounted for more than 50% of global oil demand growth over the past decade. Earlier optimism suggests that given the right conditions, oil prices could shrug off the current weakness of a slowing global economy, but it will be an uncertain struggle with some serious bumps along the way. Natural gas spot prices rose at most locations this week. Henry Hub spot prices rose from $2.28 per million British thermal units (MMBtu) last week to $2.67/MMBtu this week. At the New York Mercantile Exchange (Nymex), the November 2019 contract expired at $2.597/MMBtu, up 32¢/MMBtu from last week. The December 2019 contract increased to $2.691/MMBtu, up 26¢/MMBtu from last week to this week. The price of the 12-month strip averaging December 2019 through November 2020 futures contracts climbed 14¢/MMBtu to $2.498/MMBtu.
European stocks hit a 22-month high after the EU granted a Brexit extension. Highs were also supported by encouraging Chinese manufacturing data, and strong asset inflows into the region. The pan-European STOXX Europe 600 Index hit a 22-month high Monday and rose for the week. The German DAX and Italy’s FTSE MIB Index also gained, while the UK’s FTSE 100 Index dropped. Following UK Prime Minister Boris Johnson winning backing for a December 12 general election, the country headed immediately into election campaigning. Thanks to the plan, the UK will now have the ability to leave the bloc if the UK and the EU ratify the withdrawal deal that Johnson agreed to in October.
In China, stocks showed a strong weekly gain as positive earnings from mainland companies and data showing an upswing in private manufacturing activity helped dispel concerns about U.S.-China trade battles. The benchmark Shanghai Composite Index edged up 0.1%, and the large-cap CSI 300 Index rose 1.4% on the week. The Caixin/Markit manufacturing purchasing managers’ index (PMI) unexpectedly rose to 51.7 in October – its best reading since February 2017. The strong showing for the influential Caixin PMI survey, which tracks roughly 500 private factories, helped to support the positive condition of China’s economy despite the impact of U.S. tariffs. However, other data on the week made it clear that U.S. tariffs have had a toll the country’s manufacturing sector. China’s official factory activity gauge, the manufacturing PMI, fell to an eight-month low of 49.3 in October—the sixth straight month the index has stayed below 50. China’s economy grew below its forecast 6.0% in the third quarter. That is China’s slowest growth pace since 1992.
The Week Ahead
A number of important economic data points will be released this week including durable goods, the services Purchasing Manager’s Index, ISM manufacturing, weekly jobless claim, consumer sentiment index and the University of Michigan’s consumer sentiment this Friday.
Key Topics to Watch
- Factory orders
- Trade deficit
- Markit services PMI
- ISM non-manufacturing index
- Job openings
- Unit labor costs
- Weekly jobless claims
- Consumer credit
- Consumer sentiment index
- Wholesale inventories
Markets Index Wrap Up