General market news
- Rates moved up for the second week in a row, reversing some of the decline we experienced at the beginning of the year. The 10-year Treasury opened the week at 2.75 percent, while the 30-year opened slightly higher at 3.07 percent and the 2-year opened at 2.59 percent.
- The three major U.S. markets all posted gains on the week. The two main drivers of positive investor sentiment included optimism surrounding a U.S.-Chinese trade deal and a perceived dovish tone from Federal Reserve (Fed) members. On Thursday, the Wall Street Journal reported that Treasury Secretary Mnuchin had discussed lowering tariffs on Chinese goods as an olive branch to Chinese negotiators. Usually hawkish, Kansas City Fed President Esther George said that a pause in the Fed’s normalization process would give the bank time to make a proper assessment of the incoming data. Finally, New York Fed President Williams stated that a government shutdown could cut quarterly growth from 0.5 percent to 1 percent, depending on its length.
- Financials, industrials, and energy were among the top-performing sectors. Oil posted gains, and banks (including Goldman Sachs and Bank of America) posted strong beats. The worst performers were utilities and consumer staples, with investors favoring a risk-on sentiment.
- The Producer Price Index came in slightly softer than expected, with the core index (excluding food and energy) falling 0.1 percent month-over-month versus the estimate of a gain of 0.2 percent.
- The University of Michigan consumer sentiment survey declined from 98.3 to 90.7, which was much lower than the survey estimate of 96.8. This decline likely came from a combination of equity market volatility and the government shutdown weighing on consumers.
- Government data continues to become backlogged due to the shutdown. Some data points may be missed depending on the length of the shutdown.
What to look forward to
As with last week, several of the scheduled reports are prepared by government agencies currently affected by the shutdown and will not be released until the government reopens. This would be a slow week anyway. But with the shutdown, it will be especially slow.
On Tuesday, the existing home sales report is expected to pull back from 5,320,000 in November to 5,270,000 in December. This result would indicate continued weakness in the housing market and would be consistent with declining consumer confidence and housing affordability.
On Friday, the durable goods orders report will not be released, but the numbers are expected to improve. For the headline number, which includes the very volatile aircraft sector, growth is expected to rise from 0.8 percent in November to 1.5 percent in December. Here, there is significant upside risk based on increases in orders for planes. The core number, which is a much better economic indicator, is also expected to rise, from a decline of 0.3 percent in November to a gain of 0.2 percent for December. This result would indicate that business investment may be moderating but continues to expand.
Also on Friday, the new home sales report is scheduled, but it will not be released due to the shutdown. No estimates are currently available as to expected results.
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