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Weekly Update – December 07, 2018

  • The hoped-for “Santa” rally took a detour this week, misrouted by unclear directions from the Federal Reserve and Tariff Man. The S&P 500 moved negative YTD, returning to correction territory and capping its third-worst weekly performance of the year. The news, however, skewed positive, with China signaling it considers the Huawei matter separate from trade negotiations, and nonfarm payrolls data coming in light, which fits into the narrative of the Fed looking for a pause. The OPEC+ production cut was also larger than estimated.
  • Nonetheless, other issues clouded the horizon: slower global growth, peak earnings worries and possible recession signals from the yield curve as a spread inversion between the three- and five-year notes persisted through the week. The last such inversion occurred in 2017, before the Great Recession of 2008. The 10-year U.S. Treasury yield fell back to about 2.86%.
  • Oil prices slid but mostly recovered after OPEC and Russia agreed to substantial production cuts. Gold prices gained significantly for the week.
  • U.S. nonfarm payrolls increased by 155,000 in November — fewer than the average of 220,000 per month in the first two-thirds of 2018, but extending a record-breaking streak of 98 straight months of job gains. The unemployment and labor-force participation rates held steady at 3.7% and 62.9%, respectively. November YoY wage growth matched October’s 3.1% rate, the best since 2009. Average hourly earnings increased six cents to $27.35.
  • November’s ISM manufacturing indicator came in at 59.3, ahead of October’s 57.7 level. The new orders component registered 62.1, up 4.7 points from October. The employment component rose to 58.4 from 56.8, pointing to a faster pace of manufacturing job gains. Respondent commentary was generally positive but cautious, again highlighting challenges from tariffs and a tight labor market.  Elsewhere, the final Markit manufacturing PMI for November came in at 55.3, slightly below the 55.4 consensus.
  • November’s IHS Markit Eurozone Manufacturing PMI final reading came in at 51.8 in November, down from 52.0 in October. The euro area’s “big-four” economies posted the lowest PMIs of all countries covered by the survey. Italy registered its lowest reading in nearly four years.

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