Volatility reigned over the markets last week despite generally positive economic news. Markets reversed Monday gains after conflicting statements from the US administration and the arrest of a high-profile Chinese executive called US-China trade progress into question. The S&P 500 fell 4.6% and bond yields improved, with the 10-year 16bp better on the week in the risk-off trade environment. China has subsequently confirmed its belief that an agreement can be reached within the stated 90-days period, and tentatively proposed a plan to resume importing oil and agricultural products from the U.S.
During volatile periods, computer trading programs often lead market activity; extreme stock price declines can result when passive investors follow suit. Recent commentary suggests that an extended trade war may lead to a possible recession, but we do not believe that will happen China and the U.S. are very much aware of the potential damage if they fail to resolve trade issues. In our view, the selloff last week highlights the global damage that can result from restricting free and fair market trade. This may actually help trade negotiations, as both the US and China understand the negative impacts of a trade war, and markets are sending a clear message that outstanding issues need to be resolved.
Turning to economic data, last week’s job report saw payrolls increase by 155,000, below expectations of 190,000 new jobs. Unemployment remained steady at 3.7% but job growth and monthly wage growth fall short of expectations. A silver lining in the report is that softer data may delay future Fed hikes. The probability for a 25bp hike at next week’s Fed meeting is now 75%, but the chance of another hike in March is now just 22%, according to CME Group futures data. You can track the data here.
Market Returns and Data
|DJ Industrial Average||-4.46%||-4.46%||-7.45%||0.22%|
|Barclays US High Yield||-0.14%||-0.14%||-2.59%||-0.08%|
|Barclays Muni Aggregate||0.73%||0.73%||1.22%||0.81%|
|WTI Oil ($/barrel)||$52.61||$50.93||$73.25||$60.42|
|Brent Oil ($/barrel)||$61.67||$58.71||$82.72||$66.87|
|Natural Gas ($/mmBtu)||$4.49||$4.61||$3.01||$2.95|
|Fed Funds Target *||2.25%||2.25%||2.25%||1.50%|
|3-Month US Dollar Libor||2.77%||2.74%||2.40%||1.69%|
|US Treasuries 2-Year||2.71%||2.81%||2.81%||1.89%|
|US Treasuries 10-Year||2.85%||3.01%||3.05%||2.41%|
|US Treasury 2-10 Slope||0.14%||0.21%||0.24%||0.52%|
|German Bunds 10-Year||0.25%||0.31%||0.47%||0.43%|
|TED Spread (bps) **||36||39||20||32|
Source: GSAM, Pac Global, CME Group