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Stone's Weekly Market Guide - Week of August 26, 2018

Chart of the Week: With the political turmoil surrounding President Trump, an assessment of past periods surrounding impeachment is prudent risk management. This analysis is not a political statement on my part, but investors should keep in mind that impeachment is a political and not a legal process. It does seem from the analysis that politics do matter for the market, but clearly the economic backdrop matters as well. Regarding the Nixon period, stocks had peaked in January 1973 and inflation spiked after the oil embargo. Despite worries about Russian default and the collapse of Long-Term Capital Management (LTCM)roiling the markets in 1998 during the Clinton period, the economic backdrop was strong with the tech boom coming on the horizon.


The data release calendar remains fairly sparse, so headlines are likely to be dominated by geopolitical and domestic political issues. Turkish markets re-open after a long holiday last week with their fundamental weaknesses not yet solved. Please see our past blog post for details on Turkey.


Geopolitical: Markets will continue to watch for additional trade news between the U.S. and China. Reports indicate that a bilateral NAFTA trade deal with Mexico is making progress. A deal with Mexico should be seen as a positive and likely helps progress with Canada as well.


U.S.: July personal income and spending are the highlights, since they will impact expectations for 3Q GDP. 2Q GDP is likely to be revised down to 4.0% from 4.1%. The Fed’s preferred inflation gauge, the PCE deflator, is expected to rise to 2.3%. 3Q GDP estimates from the Atlanta and NY Fed are 4.59% and 1.96%.


Europe: The Eurozone reports August consumer inflation (CPI), expected to hold steady at 2.1% year-over-year (Y/Y). Consensus expects German August IFO business sentiment to improve slightly.


Asia: Japan has July employment data. August PMI data from China will be watched to judge economic momentum despite the current trade spat with the U.S. along with the distress in some emerging economies.


The central banks of Iceland, Israel, Guatemala, Mozambique, South Korea, Bulgaria and Dominican Republic meet. Both Israel and South Korea are expected to hold their policy rates steady.

Despite the political turmoil surrounding President Trump, the S&P 500 set an all-time closing high last week as a testament to robust earnings. Both developed international and emerging market stocks were higher with EM particularly strong. The 10-year U.S. Treasury yield fell to 2.81%.


Global PMI readings for August continued to support the view that economic growth continues despite all the trade noise. The Markit U.S. manufacturing PMI fell to a still strong 54.5 from 55.3 in July, while the Eurozone reading eased slightly as well to 54.6 from 55.1 and Japan rose to 52.5 from 52.3.


Global PMI Readings - Source: Bloomberg, Stone Investment Partners

Chair Powell spoke at Jackson Hole on Friday. Powell cheered the markets by continuing to focus on a “gradual” tightening pace expectation for the Fed. Markets are currently pricing in a 92% chance of a 0.25% hike when the FOMC next meets on September 26.


The 10-2 yield curve flattened to a new post-Great recession low during last week and ended at 18.75 basis points, and our improved measure of 3 month 6 quarters forward – 3 month narrowed to 71.4 basis points. Please see our past post for our analysis of the economic and financial market implications.


U.S. 10yr - 2yr Yield - Source: Bloomberg, Stone Investment Partners

U.S. 3mo 6 Qtrs Fwd - 3mo Yield - Source: Bloomberg, Stone Investment Partners

The PDF version of Stone's Weekly Market Guide is linked here.

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