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Stone's Weekly Market Guide - Week of September 9, 2018

Chart of the Week: This week marks the 10th anniversary of the collapse of Lehman Brothers, which remains the largest bankruptcy filing in U.S. history. Our chart shows how far both the economy and financial markets have come since those dark days with stocks, employment and the size of the U.S. economy above the levels prior to the financial crisis and certainly well above the levels at the nadir. Two lessons come to mind: Be prepared for asset prices to fall well below fair value particularly during times of significant economic distress. The U.S. economy and stocks have always recovered. These are not new lessons as they were true before, but worth remembering as time ticks toward the next challenge.


On a personal note, in the near future I’ll be announcing an exciting new role for me. I’m planning to continue to share investment insights once settled there. I appreciate all the support of Stone Investment Partners since its founding earlier this year, but this next chapter promises to be even better.


Jobs, GDP and Stocks Since the Financial Crisis - Source: Bloomberg, Stone Investment Partners

Geopolitical: Markets will continue to watch for additional trade news. President Trump indicated that tariffs on an additional $267 billion of Chinese goods were ready on top of the $200 billion that could be implemented “very soon depending on what happens.” Meanwhile the U.S. trade deficit with China reached an all-time high of $31.1 billion in August. U.S. and E.U. trade representatives meet on Monday to continue trade discussions to lower tariffs. U.S. trade deals with Canada and South Korea are also possible.


U.S.: Crowded calendar of data, but the releases to watch are August consumer inflation (CPI) and retail sales. The CPI report will be watched more closely following the jobs report last week showing wages growing at the fastest rate since 2009 at 2.9% year-over-year (Y/Y). Retail sales should give a read on the consumer and 3Q GDP strength. 3Q GDP estimates from the Atlanta and NY Fed are 4.36% and 2.23%.


U.S. Wages and 10-Year Yield - Source: Bloomberg, Stone Investment Partners

Europe: The Eurozone and Germany have the September ZEW survey. U.K. July unemployment and wage data are expected. Both the European Central Bank (ECB) and Bank of England (BOE) meet with neither expected to change policy. The ECB comments and new economic projections will be watched closely for clues as to any change in the timing of the reduction in asset purchases or rate increases.


Asia: Japan has July tertiary industry index and core machine orders. China reported August PPI and CPI at 4.1% and 2.3% Y/Y respectively. August new yuan loans, retail sales and industrial production are expected out of China as well.


The central banks of Peru and Russia meet and are expected to hold their policy rates steady. Both Turkey and Argentina are expected to revisit their short-term policy rates which are currently at 17.75% and 60.0% respectively. Both currencies have been under significant pressure due to weak fundamentals. Consensus expects Turkey to raise their rate to 20.75%, while Argentina might hold steady.


The S&P 500 fell a bit more than 1% with technology and energy particularly weak. Developed and emerging market stocks performed even worse than the U.S. The 10-year U.S. Treasury yields rose sharply on Friday following the strong wage growth noted earlier and ended the week at 2.94%.


The 10-2 yield curve essentially held steady after hitting a new post-Great recession low a few weeks ago and ended at 23.2 basis points, and our improved measure of 3 month 6 quarters forward – 3 month steepened to 74.7 basis points. Please see our past post for our analysis of the economic and financial market implications.


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

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