What does the recent weakness in economic data mean for markets? 

David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Feb. 19, 2019

 

Driven by rising optimism that a trade deal with China may actually happen, stocks surged higher last week. The S&P 500 climbed 2.5 percent, its third straight weekly gain. In the process, the index closed above its 200-day moving average on Tuesday for the first time since December 3, and remained above it through Friday, and now sits 10.7 percent higher on the year.

Energy stocks led the way last week and have been the second-best performing sector year-to-date on evidence of production discipline by Saudi Arabia and hopes that the global economic slowdown may be bottoming. West Texas Intermediate Crude rose $3.22 a barrel last week, to close at $55.94, its best level since mid-November. That same optimism once again drove industrial stocks higher, climbing 3.6 percent for the week and leading the way year-to-date with a gain of 17.5 percent. Lagging last week, as they have since the start of the year, were the defensive groups of utilities and consumer staples. Real estate was also a laggard last week but remains among the better performers so far on the year. 

Assuming one is forthcoming, it is difficult to anticipate how comprehensive any trade deal with China might be, or how business and investors will react to it. But for now, both sides are saying that progress is being made, and that has led to a rise in sentiment. Talks are scheduled to resume in Washington this week, and president Trump has indicated a willingness to extend the March 1 deadline, with the imposition of no new tariffs, if progress is being made. Both sides have also made it clear that important differences remain and that a final deal will be difficult to achieve. But talks are continuing, and both sides have reason to want a successful outcome.

Economic data showing some weakness 

The recent strength in stocks belies the recent weakness in economic data. Last week, the delayed December retail sales report was shockingly weak, so much so that many questioned the accuracy of the data. That was followed by a surprisingly weak industrial production report for January, mostly the result of a decline in manufacturing, particularly automobiles. Thankfully, the preliminary report on consumer sentiment for February stabilized after a sharp drop in the January report. If the weak December retail sales report turns out to be accurate, subsequently improving consumer sentiment helps to support the case of a temporary economic slowdown at the end of last year, caused by both weak markets and the government shutdown. Time will tell. 

Among developed markets, the recent economic slowdown is being felt most acutely in Europe. In the Eurozone, fourth quarter GDP grew by just 0.2 percent (according to Factset), and the December readings on retail sales and industrial production were decidedly weak. In Germany, fourth quarter GDP was flat, and it followed a third quarter in which activity actually contracted. This weakness has prompted some members of the European Central Bank to speculate that a dovish turn by the central bank may be forthcoming, perhaps in the form of long-term bank loans and forward guidance concerning interest rate policy. Last week’s trade talk optimism was music to the ears of the trade dependent German economy, and the DAX index rose accordingly, climbing 3.6 percent, after two straight weeks of declines. The Eurozone-wide Stoxx 50 index rose 3.4 percent for the week. However, the uncertain path of future trade talks with the EU, particularly as it relates to the issue of whether automobile exports to the U.S. presents a national security risk, remains an overhang on sentiment. 

Investors mostly ignore noise out of Washington, but continue to focus on trade negotiations 

The U.S. managed to avoid another government shutdown last week by agreeing to an immigration and spending bill. The president nevertheless declared a national emergency in effort to secure more funding than the bill provided for the construction of a border wall between the U.S. and Mexico. Although the government remains open, the likely success of the president’s gambit is uncertain, as preparations are underway among several constituencies to challenge the emergency declaration in court. But investors viewed these developments with a certain detachment, focusing instead on the trade talks. 

In addition to the trade talks, the economy will be back in focus this week with scheduled reports that include December durable goods, February flash PMIs, January leading indicators and existing home sales, as well as the February home builders index, which edged higher in January after having weakened throughout much of last year as the Fed was raising interest rates. We will also see the minutes from the Fed’s January meeting, which should shed more light on its decision to pause.