Market Commentary for Week Ended 11/15/2019

Both stocks and bonds were up this week quite comfortably.  Most strikingly, the 30 Year Treasury yield went from 2.42% last Friday to 2.32% early this afternoon, highlighting a readjustment of growth expectations after the weak Chinese economic data reported earlier this week.  Also, Jerome Powell, Chairman of the Federal Reserve, spoke at the economic club in New York.  He highlighted the Fed’s desire to be cautious and accommodate the market, which also cooled interest rates.  Speaking of accommodation, the Fed recently began reinflating their balance sheet in order to calm the inter-bank repo market.   They have added $288 billion of liquidity to the market in the last two months.  This is perhaps a contributing factor to the low volatility in the equity markets.

Graph of Federal Reserve's Balance Sheet (in millions USD)

It was a week of extraordinarily low volatility.  Over the last nine trading days, the average intraday swing for the S&P 500 was 15 points which is less than half of its average.

Last evening, Larry Kudlow indicated further progress toward a potential deal with China this week.  This news immediately sent the S&P 500 futures higher by about 0.5%.  We have heard this story before, however, and skeptical eyes are watching for the “imminent” phase one deal with China.  Trump threatened to raise tariffs even further if there is no phase one deal that satisfies him.  Currently, another wave of tariffs is set to go live on December 15^th.

A better than expected earnings season has also eased fears of a recession. For instance, Walmart announced earnings yesterday and handily beat expectations.  They are the largest retailer in the US and their strong report bolstered confidence.  Additionally, an economic report on US retail sales slightly beat expectations this morning.

The current six-week winning streak for the S&P 500 is the longest since November 2017.

Economic Data Recap

Here is a summary of the notable economic data points released during the week.  CPI and retail sales were in-line with expectations while the industrial production numbers came in well below expectations.

1. 11/13 Consumer Price Index (CPI): The monthly report for consumer prices was released on Wednesday of this week.  In total, consumer prices increased 0.4% in the month of October.  This was in-line with expectations.  The CPI, less food and energy, known as core CPI, rose a paltry 0.2% for the month of October.  This feeds the Federal Reserves narrative that inflation is muted, and an accommodative monetary policy is appropriate
2. 11/15 Retail Sales:  Retail sales numbers are a barometer on the strength of the consumer.  Consumer consumption represents 70% of the US economy and thus is very important to economists.  For the month of October retail sales came in slightly above expectations at a 0.3% increase versus expectations for an increase of 0.2%.  The consumer is doing just fine.
3. 11/15 Industrial Production:  Industrial production came in well below the consensus estimate at a contraction of 0.8%.  The consensus was for a contraction of 0.4%.  Motor vehicle production was the weakest subcategory with a 7.1% decrease which is primarily driven by the worker strikes at General Motors.  Now that the strikes have ended, economists expect an upswing in vehicle production in the coming months.   The weak number isn’t just attributed to vehicles however, production of business equipment also fell 0.6% which is concerning for the business spending subset of the indicator.