Weekly Market Snapshot

15 October 2018

“There has very definitively been a change of gear over the past 10 days”

- UK Chancellor of the Exchequer Philip Hammond, on the negotiations over Brexit

... The week in review:

Today’s challenge: Markets vs. economics This past week was difficult for bulls, with most headline asset classes turning in negative returns – even after Friday’s action.

The S&P 500 closed below its psychologically-important 200-day moving average on Thursday the 11th and traded just below it for much of Friday. At its intra-day low on October 11th, the overall drop from the market’s 2018 high on September 21 came to (7.83%), not quite qualifying as a full-blown correction – but the NASDAQ Composite made the grade, falling (10.6%) from its high on August 30 to its intra-day low on October 11.

U.S. broad-based fixed-income indexes also retreated slightly for the week, and the Treasury yield curve flattened as safe-haven demand weighed on yields from 10-years and longer. The yield on the 10-year Treasury spent much of Friday in the range of 3.14% - 3.18%, down notably from its 2018 high of 3.259% on October 9.

Unusually for this steep of a pullback, no single piece of economic or market news seemed to drive the rout. To be sure, there was plenty of negative sentiment to go around – from saber-rattling on tariffs to potential shortages of crude oil; nervousness about the current earnings season; the International Monetary Fund (IMF) reducing its forecast for global growth; and Federal Reserve officials speechifying about the possibility of hiking rates to slightly above “neutral” in future meetings of the FOMC.

But by week’s end, the markets’ moves were described by many observers as a “technical” pullback as much as anything else, with some valuation-sensitive active fundamental investors using the pullback to buy favored assets at favorable prices.

Italy: Agreement to disagree The official version of Italy’s budget was ratified by Italy’s coalition government, with its draft 2.4% deficit still in place, defying the European Union’s warnings about exceeding its guidelines – but increasing political goodwill for the Eurosceptic parties in Italy’s ruling coalition. This sets the stage for continued confrontation, which is unlikely to calm Italy’s equity or bond markets, where 10-year spreads to benchmark German rates remain near 2018 highs, at about 3.08%.

U.S. – China trade: Volume matters September’s trade with China set new records, with a $34.1 billion surplus for China, bringing the year-to-date figure to $225.8 billion, according to official figures from China. The year-ago figure for the same period was $196 billion. The increase came from a 14.5% increase in exports to the U.S., as well as a decline in the goods that China bought from the U.S. Ironically, the increase in the surplus comes in part from a booming U.S. economy, which is increasing the demand for goods from China. It’s yet unclear how much of the increase in exports from China is due to inventory boosts in advance of the imposition of the next round of tariffs from both countries.

In related news, the IMF announced, via an interview with Markus Rodlauer, Deputy Director of the IMF’s Asia and Pacific Department that the renminbi (yuan) is “not out of line,,, [and] broadly in line with the fundamentals”, and went on to say that the People’s Bank of China (PBoC), the country’s central bank, was allowing the exchange rate to respond to “market pressures”. This assessment could have a positive influence on the upcoming semi-annual assessment of the state of the world’s currencies by the U.S. Treasury Department.

All data Source: Bloomberg, as of Oct 12, 2018, 2:20 PM ET

Definitions:

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

The NASDAQ Composite Index is a market-capitalization-weighted index that is designed to represent the performance of NASDAQ securities and includes over 3,000 stocks.

... CHART OF THE WEEK:

Stock valuation: An Updside of the Downdraft

Chart of the week

Source: Bloomberg, October 12, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The sudden downturn in stocks this past week had a dramatic impact on valuations Stocks are now trading at a significant discount to valuations early this year.
  • Based on expected earnings, the S&P 500 is now trading at a P/E of 16.8, about 10.4% below its level on January 26. But over the same interval, the S&P 500 fell some 5.0%1.
  • In effect, the P/E has gotten 5.4% more attractive than the falling price alone would warrant.
  • In addition, a P/E of 16.8 is notably below the five-year average P/E of about 17.4.
  • The source of this intriguing discount: increases in the overall expected earnings power of the companies in the index.
  • The source of this intriguing discount: increases in the overall expected earnings power of the companies in the index.
  • As the current earnings season begins, it’s worth recounting the key drivers of the improvement, including lower corporate taxes, strong overall economic growth, and boosts to profitability from declining raw materials prices and relatively moderate growth in wages and other components of employee costs.
  • When added to corporate stock buybacks and a surge of earnings-accretive mergers and acquisitions, there remains a case for solid fundamentals as well as longer-term value.
  • That’s not to deny the headwinds facing the global economy – uncertainty about the impact of rising tariffs, rising rates in the U.S., geopolitical tensions and other familiar concerns.
  • But when strong fundamentals meet market anxieties, opportunities for appreciation can emerge for astute, valuation-sensitive active investors. Seen another way, worry sometimes sets the stage for future gains.
The chart:

  • The chart shows, between December 29, 2017 and August 30, 2018, the percent appreciation of the S&P 500 Index, the MSCI All-Country World ex U.S. Index, and the Bloomberg Dollar Spot Index.

The chart shows, for January 2 to October 11, 2018, the forward P/E ratio of the S&P 500 Index, based on earnings estimates supplied by Bloomberg.

1Data as of close of trading on Thursday, October 11, 2018. Source: Bloomberg.


DEFINITIONS:

The price-earnings (P/E) ratio is a stock's (or index’s) price divided by its earnings per share (or index earnings). The forward or estimated P/E ratio is a stock’s (or index’s) current price divided by its estimated earnings per share (or estimated index earnings), usually one-year ahead.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed.

Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.


IMPORTANT INFORMATION:

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
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All Investors in Hong Kong and Singapore:
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This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
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This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
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All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.

© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

8 October 2018

U.S. jobs: No slack “Banks are restricting credit. They are struggling to deploy their liquidity”

- Mario Ravagnan, CEO of an Italian engineering company.

THE WEEK IN REVIEW...

U.S. jobs: No slack Despite the unexpectedly low 134k increase in non-farm payrolls, September’s employment report generated yet another record: a 48-year low in the headline unemployment rate (3.7%). Other figures were positive, if less spectacular. Average hourly earnings were up an annualized 2.8% and average weekly hours worked remained unchanged at 34.5.

Treasury yields were relatively unchanged from Thursday’s levels, having already moved up earlier in the week, perhaps reflecting several optimistic speeches by Fed Chair Powell since the Sept. 27 rate decision. The 30-year yield traded at 3.39%, up a full 18.3 basis points since the same time a week ago; the 10-year held at 3.22%, up just over 16 bps. All in, the yield curve is unambiguously steeper than a week ago, suggesting that recession might be a bit farther away.

Equities had a more typical good-news-is-bad-news reaction. The Dow Jones Industrial Average was down some 232 points to about 26,395 (0.88%) and the NASDAQ down some 100 points to 7775, about (1.3%). These moves appeared to be in reaction to the rising prospect of three rather than two hikes by the Fed in 2019, in reaction to continued economic strength.

India: Oil price pain The spot price of Brent Crude now stands at about $84.64, up about 35% from this year’s February low of $62.59. But for India, the rise has been steeper – greater than 50% in Indian rupees, as the currency fell from 63.4 to the dollar to 73.76.

All the more reason that Friday’s decision by India’s central bank to leave its main policy rate unchanged at 6.50%. vs what? were they thinking of a hike or a cut? Indian stocks fell some 2.25% on the news and the rupee fell 0.52%. It’s unclear whether the central bank believes inflation will stay under control – its GDP forecast is for 7.4% growth in 2018 and 2019, and consumer prices are forecast to end the year up 5% and to be 4.7% in 2019. But in light of current currency and energy prices, those forecasts might look increasingly brave over the next few months.

Trade: OK to USMCA Completed just in time to beat a self-imposed deadline, the new treaty replacing NAFTA preserved Canada’s place in the agreement and appeared to contain enough changes to satisfy political requirements in all three countries. One clause clearly aimed at China proposes to forbid trade with “non-market” countries; the penalty would be to grant the remaining countries the right to withdraw from the trade pact to form their own. Importantly, the deal was endorsed by Mexico’s president-elect, Andres Manuel Lopez Obrador, who will take office in January. Details have yet to be filled in, but many observers expect the major impact will be the existence of the deal itself rather than any of its terms.

All data Source: Bloomberg, October 5, 2018, unless otherwise indicated.

... CHART OF THE WEEK:

Bond Yields: Hike, then Spike

weekly chart of the week

Source: Bloomberg, 5 October, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Though the FOMC’s Sept 26 rate hike surprised no one, in its wake the U.S. Treasury yield curve saw some unexpected changes, reflecting some new economic expectations.
  • In the weeks before the hike, observers fretted about whether the yield of 10-year Treasuries might rise above 3%, potentially flattening the yield curve between 10 and 30 years and heightening nascent concerns about rate hikes moving the economy toward recession.
  • But that’s not how market reaction has played out. The 10-year yield did break the 3% threshold, reaching1 3.214% on Oct 5. But instead of flattening, the 10- to 30-year portion (the 10-30 spread) rose, steepening the curve. Indeed the spread between the 30 year and 10 year rates reached about 16.5 basis points (bps) on October 4, well above the July 11 low of 10.14 bps when concerns about recession appeared most intense.
  • That’s because the shift was to mostly due to a rise on tne long end, with the 30-year Treasury yield moving as high as 3.39% on October 4th.
  • The 30-year is little affected by Fed policy. Instead it tends to reflect bond market expectations for future growth – and the prospect of growth-related inflation. So however slight the rise in the 30-year and the 10-30 spread might be, the signal is no less clear.
  • The bottom line: the bond market’s assessment of the likelihood of a recession is that it is further in the future – roughly in line with Fed Chairman Powell’s overall optimistic view of a growing economy with no obvious short-term obstacles.

The chart:

  • The chart shows, between Sept 21 and October 5, 2018, the yield of the generic 10-year Treasury, as well as the spread between the 10-year and 30-year Treasuries.

1 Source: Bloomberg, October 5, 2018, 9:55 AM ET


DEFINITIONS:

The Dow Jones Industrial Average (DJIA) is an unmanaged index composed of 30 blue-chip stocks, each with annual sales exceeding $7 billion. The DJIA is price-weighted, reflects large-cap companies representative of U.S. industry, and historically has moved in tandem with other major market indexes such as the S&P 500.

The NASDAQ Composite Index is a market-capitalization-weighted index that is designed to represent the performance of NASDAQ securities and includes over 3,000 stocks.

Brent Crude Oil is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes.

The North American Free Trade Agreement (NAFTA) – Spanish: Tratado de Libre Comercio de América del Norte, TLCAN; French: Accord de libre-échange nord-américain, ALÉNA – is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994.

The United States–Mexico–Canada Agreement (USMCA; Spanish: Acuerdo Estados Unidos-México-Canadá, AEUMC; French: Accord États-Unis-Mexique-Canada, AÉUMC) is a pending free trade agreement between Canada, Mexico, and the United States, intended to replace the current North American Free Trade Agreement (NAFTA). It is the result of the 2017–2018 renegotiation of NAFTA by its member states, which informally agreed to the terms on September 30, 2018, and formally on October 1. Final ratification and implementation is pending.

A spread is the difference in yield between two different types of fixed income securities with similar but not identical characteristics, such as maturity, credit quality or currency.


The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

IMPORTANT INFORMATION:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

1 October 2018

Italy: Budget Buster “I won't quit, for the good of the country…. we would throw the country into chaos."

- Italy’s Finance Minister Giovanni Tria

THE WEEK IN REVIEW...

Italy: Budget Buster At 11.1% of European Union (EU) GDP, Italy ranks fourth among the 28 member states. So it matters that its early budget, announced by leaders of the ruling coalition, has a deficit target of 2.4% – notably above the EU’s maximum threshold of 2%. As of the end of 2017 (latest figures available), Italy already had the largest public debt of any EU country, €2.5 trillion, according to EU agency Eurostat. The government is required to present a completed draft budget to the European Commission for approval by mid-October.

The budget, along with the defiant tone of its promoters, was a political slap in the face to moderate Finance Minister Giovanni Tria and a significant setback for financial markets. At the close of European trading on Friday, September 28, the FTSE MIB index of Italy’s stocks was down (3.72)%, the yield on Italy’s 30-year bond rose from 3.58% to as high as 3.78%, a hefty 20 bps. As of late in the day on September 28 Mr. Tria said he’d stay in office, “for the good of the country”.

Among the programs in the budget are a “citizen’s income” for the poor, tax cuts, and a rollback of pension reforms that had raised the retirement age.

Argentina: Strike up the band The International Monetary Fund (IMF) revised its deal with Argentina yet again, this time setting a band of currency values in which the peso would be permitted to “float” before the central bank could intervene.

The amount of aid for the overall deal is now a total of $57 billion, of which $15 billion has already been disbursed and $35 billion is disbursable between now and the end of 2019. The deal was described by IMF head Christine Lagarde as the “biggest ever”, covering almost all of the government’s $40 billion in foreign-denominated debt repayments due by the end of that year. But the funding is also available to be used to finance the budget if needed.

Important details of the new currency regime include that there would be “a floating exchange rate regime without intervention”, but with some allowances for “limited intervention to prevent disorderly market conditions” if there is “extreme overshooting of the exchange rate”. The band for the peso was set at 34 to 44 pesos per U.S. dollar. Outside of that range, the central bank would be able to spend up to $150 million per day from its reserves to support the currency. The theory appears to be that covering Argentina’s foreign debt and budget would eliminate the prospect of a default and forestall, if not remove, the possibility of a severe austerity plan that would further harm people dependent on government programs such as pensions and salaries.

So far, the peso had traded as high as 41.54 per dollar, and closed trading on September 28 at 41.31.

U.S. Economy and the Fed: Upward and onward On Wednesday, the FOMC voted 9-0 to raise its target rate range 25 basis points (bps) to 2.25% - 2.00% (upper and lower bounds). Financial markets reacted calmly, as the hike was widely anticipated; after an intra-day wobble of just under 1%, the S&P 500 ended the day down (0.33%); the 10-year Treasury fell about 5 bps to 3.048%.

Observers saw the removal of the word “accommodative” from the Fed’s monthly Statement as the most newsworthy event. But Fed Chair Jay Powell took pains to say that the change didn’t reflect a shift away from its generally accommodative stance toward the economy. Given market reaction, it seemed that most readers accepted the explanation.

The week’s economic data was roughly in line with the Fed’s assessment. Personal income was up 0.3% in August from July, as was personal spending. Core PCE inflation was flat for the month, keeping the year-on-year figure at the Fed’s preferred 2.0% level. There was, however, a notable pickup in wholesale inventories rising 0.8% for the month – a faster accumulation of wholesale goods than expected. Explanation vary, but one possibility is a slowdown in export shipping due to the effects of the rising tariff regimes put in place earlier in the year.

... CHART OF THE WEEK:

Rates: Hiking In Good Weather

weekly chart of the week

Source: Bloomberg, 28 September 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • In the wake of the FOMC’s unanimous decision to raise its target rate to 2.25%, attention has been primarily focused on how many more hikes are likely over the coming year.
  • The Fed’s readiness to move forward comes against a background of persistent economic strength. The news is also good according to the Bloomberg U.S. Financial Conditions Index, a multifactor measure of the health and availability of the financial system to provide the credit needed to run – and grow – the economy.
  • The Index compares the system’s current condition to the pre-crisis period, defined as from 1994 to July 1, 2008. Values greater than zero, according to Bloomberg, indicate “accommodative” financial conditions, while negative values reflect “tighter” conditions relative the baseline pre-crisis period.
  • As of September 28, 2018, the index, at 0.935, is solidly in the “accommodative” range, close to the highest values reached over the past decade.
  • This measure is also consistent with Fed Chair Powell’s description of the economy as strong, and the FOMC’s stance as continuing to be “accommodative” in his remarks at the post-decision press conference. Mr. Powell described the removal of that word from the Fed’s statement to be pro-forma rather than a reflection of change in the FOMC’s opinion about the state of the financial system.
  • The bottom line: The Fed is in the fortunate position of raising rates into economic conditions that appear – at least for now – to be capable of bearing the change.
  • For more on the Fed’s stance toward the current economic environment, read Western Asset’s Accommodative No Longer?.
  • The chart:

    • The chart shows, for the period January 2013 to September 28, 2018, the Fed Funds Target Rate (upper bound) and the Bloomberg U.S. Financial Conditions Index.

All data Source: Bloomberg, September 28, 2018, unless otherwise specified.


DEFINITIONS:

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Funds rate (Fed Funds rate, Fed Funds target rate or intended Federal Funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

The Bloomberg U.S. Financial Conditions Index (BFCIUS) tracks the overall level of financial stress in the U.S. money, bond, and equity markets to help assess the availability and cost of credit. A positive value indicates accommodative financial conditions, while a negative value indicates tighter financial conditions relative to pre-crisis norms. The index is a Z-Score that indicates the number of standard deviations by which current financial conditions deviate from normal (pre-crisis) levels.


IMPORTANT INFORMATION:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444. 
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

24 Spetember 2018

The Fed and Jobs: Lighting the Way “I will not overturn the result of the [UK Brexit] referendum nor will I break up my country.”

- UK Prime Minister Theresa May

THE WEEK IN REVIEW...

The Fed and Jobs: Lighting the way Last week’s initial jobless claims figures continued their downward plunge, reaching 201k for the week ended September 15, a figure not seen since October 1969. The weekly figures are famous for their fluctuations; nonetheless, the downward direction has been clear so far – and broadly confirms the monthly figures for August (3.9% headline unemployment) and July (job openings continuing to surge past the number of seekers).

Seen in this light, the Fed’s rate decision and economic forecasts (the so-called “dot plot”), to be announced on September 26th could seem foregone. But market observers and analysts are even more focused on the nuances of the monthly statement and the tone of the press conference than before, seeking insight on the progression, shape and slope of the yield curve overall.

The big question behind those others relates to one of the great economic unknowns: the timing of a presumed recession. And with the FOMC shifting to monthly press conferences come January 2019, the level of scrutiny is likely to increase.

Europe: Hard news for a soft Brexit UK Prime Minister Theresa May’s “soft” version of Brexit was rebuffed at Thursday’s European Union summit in Austria, prompting her to respond sharply upon her return to London, declaring the negotiations to be “at an impasse”, adding, “It is not acceptable to simply reject the other side’s proposals without a detailed explanation and counter-proposals” and describing the stakes “as nothing less than the “integrity of the UK”, possibly referring to proposals dealing with the Ireland/Northern Ireland border. Among the financial markets’ reactions: the British pound fell as much as 1.5% and 1.8% vs. the euro and the dollar on the news, to €1.11 and $1.31 respectively.

China: Prudent investors After some individual investors’ experience with stocks and once-soaring wealth management products, many are placing their investments in money market funds, according to the Asset Management Association of China – to the tune of some 8.6 trillion yuan ($1.3 trillion), rivalling the amount of deposits by individuals in the Industrial and Commercial Bank of China Ltd., considered the world’s largest lender by assets.

Rather than investing in stocks and other unsecured investments, these funds invest in bank deposits as well as sovereign and other government-related bonds, which are substantially less exposed to the vagaries of financial markets.

This popularity has prompted some managers of these funds to impose limits on deposits due to the aggregate size of the sector and has made this category a major force to be reckoned with in this regulated sector of China’s financial markets.

... CHART OF THE WEEK:

Interest Rates: The New Neutral?


Chart of the week

Source: Bloomberg, September 20, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The Fed’s Open Market Committee (FOMC) meets this week as signs of robust economic growth continue to surface.
  • Most observers expect the FOMC to raise its target rate by 25 basis points to 2.25%, in line with its increasingly clear signals, delivered in speeches by Chairman Powell and other Fed members over the past few months.
  • But the Fed’s quarterly economic outlook will be scrutinized for signs of its reaction to key developments over the quarter, including the continuing escalation of trade tensions between the U.S. and its key trading partners in Canada, Japan and China.
  • The highest-profile sign will likely be the Fed’s quantitative projections of growth and inflation – the so-called “dot plot”.
  • But perhaps more important will be how it describes its decisions. Will it state that the expected hike brings an end to its post-recession “accommodative stance”, or does it believe that it will take additional moves to bring its policies into “neutral” territory?
  • A “neutral” stance is widely understood to neither stimulate economic growth beyond its “natural” rate, nor slow the economy by raising interest rates and otherwise restricting the supply of monetary assets needed to support that “natural” rate.
  • Of course, there’s very little agreement, even among skilled economists,1 about what that natural rate might be at this stage of the economy – or at any other stage, for that matter. But some observers use the oversimplified rule of thumb that any Fed Funds target rate above the core inflation rate is no longer neutral.
  • Though the Fed’s target rate will likely be above the level of former Fed Chair Janet Yellen’s favorite measure – core Personal Consumption Expenditure (PCE) inflation, other factors could continue to be accommodative – including the pace of the Fed’s net sell-down of its balance sheet.
  • The bottom line: despite the apparent certainty of the outcome of the FOMC meeting this week, there’s plenty of information to be gleaned from the meeting and its aftermath.

The chart:

  • The chart shows, between September 2008 and September 2018, the Federal Funds target rate and the core Personal Consumption Expenditures (PCE) inflation indicator.

All data Source: Bloomberg, September 6, 2018, unless otherwise specified.

1 See, for example, Laubach, Thomas, John C. Williams. 2015. “Measuring the Natural Rate of Interest Redux.” Federal Reserve Bank of San Francisco Working Paper 2015-16.


DEFINITIONS:

DEFINITIONS:

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Personal Consumption Expenditures (PCE) Price Index is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.

The Federal Funds rate (Fed Funds rate, Fed Funds target rate or intended Federal Funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.


IMPORTANT INFORMATION:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444. 
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

17 September 2018

U.S. Inflation: A Step Slower "We are under no pressure to make a deal with China, they are under pressure to make a deal with us"

- President Donald Trump

... The week in review:

U.S. Inflation: A step slower August saw producer prices(ex-food and -energy) fall (0.1%) for the month, the first such drop in 18 months. Most notable was the reduction of (0.1%) in the cost of services, most of which was due to falling margins for machinery and equipment wholesaling. Goods prices held steady, with a (0.6%) fall in food costs offset by a 0.4% increase in energy. In general, the report suggested that overall inflation may be easing at the producer level.

In contrast, consumer prices rose, though slightly less rapidly than before; for the 12 months ended Aug 30, the headline figure was 2.7%, below July’s 2.9%; ex-food and -energy, the figures were 2.2% vs. July’s 2,4%, also slightly lower than expected. Goods-sector deflation was in evidence, possibly due to the rising U.S. dollar.

These price rises are higher than the Fed’ preferred inflation measure, the core PCE deflator, which was at 2% for July; August’s figure will be released on September 28th. But it’s too soon to call these figures supportive of a more dovish overall stance by the Fed for rate hikes after the widely-expected September 26 rise.

Europe: On courseThe European Central Bank (ECB) held its first post-summer meeting on September 13, making no changes to its existing rate settings; to its schedule for trimming and then ending its bond-buying program; and to its plans to reinvest the bonds it does hold as they mature. There was no change in the forecast that inflation would remain below the ECB’s 2.0% target through 2020 or beyond.

But the tone of ECB President Mario Draghi’s comments was slightly more upbeat than in the past – including that the uncertainty of the ECB’s outlook is “receding”, and that the eurozone economy had been experiencing “growth above potential for some time”. That assessment was framed as positive, since it implied that the economy would at some point burn through its slack in employment and prices (its “output gap”) and begin generating both increased employment and strength in prices. The relatively positive tone lifted the euro vs the U.S. dollar from about $1.161 to as high as $1.172 before pulling back somewhat to about $1.166. 1

Russian rates: Pre-emptive strikeFor the first time since 2014, Russia’s central bank raised its base rate on September 13, bringing it to 7.50%, a 25 basis point rise. The move was small but unexpected, brought about as a measured response to a rise in inflation to a year-on-year rate of 3.1% as of the end of August.

Compare that move to Turkey’s long-overdue 625 bps hike on the same day, bringing the rate to 24% in the face of inflation jumping 18% year-over-year for Q3; producer prices rose over 32% during the same period, making inflation-adjusted interest rates still negative for the producer sector of the economy – hardly a recipe for stopping inflation in its tracks.

1 All prices Source: Bloomberg, September 14, 7:00 AM – 10:30 AM ET, unless otherwise indicated

... CHART OF THE WEEK:

U.S. Economy: Full Speed Ahead, So Far

Chart of the week

Source: Bloomberg, 13 September, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

  • Growth in the U.S. looks robust coming up on the 10th year since the end of the Great Recession of 2007-2009; the Federal Reserve’s confidence in the economy has grown as well, prompting seven benchmark rate hikes since Dec. 2015, with another two or more hikes likely this year.
  • Yet investors are starting to worry about when it will might end, especially given the flattening of the U.S. yield curve which began in mid-to-late 2017.
  • However, some key economic statistics surrounding the last two U.S. recessions, the signs of a slowdown in progress are largely absent.
  • Personal income, non-farm payrolls, and manufacturing and trade sales are all trending upward along with the overall economy as measured by Gross Domestic Product (GDP).
  • The only exception, industrial production, slowed its growth in 2014-2015 because it includes energy prices; West Texas Intermediate (WTI) crude oil prices fell about 75% between mid-2014 and early 2016 – from $106.30 to $26.50 – before recovering to its current level of $68.87. 2
  • All this is good for stocks, supporting the continuing earnings growth that have underpinned equity markets since the March 2009 beginning of the current bull market.
  • That’s not to say trees grow to the sky; any of these measures could turn as a result of outside forces, such as a global trade slowdown, international political trouble or so-called “unknown unknowns”. But so far, the wind is at the back of the U.S. economy.
  • What explains the difference between the curve and the other data? First, it’s important to note that the curve signal has not actually been sent. It’s the actual inversion of the curve – when short rates are above long rates – that’s the definitive signal. With Fed Funds at 2.0% and the 30-year at about 3%, it would take several more Fed hikes, a rapid rise in demand for 30-year Treasuries, or both to bring that about.
  • Second, even when the curve actually inverts, history suggests – but doesn’t require – that recession would be another 12 to 18 months ahead.
  • The bottom line: economic growth, and its support of future earnings for stocks, continues strong, and shows little sign of faltering – with the much-discussed yield curve signal still quite a ways away.
  • For more on current economic signals, explore ClearBridge Investments Recession Indicators Update: Money Supply

The chart:

  • The chart shows, between January 1997 and August 2018, the growth of key indicators of economic progress before, during and after the two most recent recessions.

All data Source: Bloomberg, 6 September, 2018, unless otherwise specified.



IMPORTANT INFORMATION:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444. 
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

10 September 2018

U.S. Jobs: Good News vs. Market News "The fallout from the [2008] crisis …is [a] key factors in explaining the backlash against globalization…and the erosion of trust in government and other institutions"

- IMF Managing Director Christine Lagarde

... The week in review:

U.S. jobs: Flattened, not Flattered, by Good News August was a strong month for jobs; the U.S. added 201k jobs, higher than expected and average hourly earnings rose to a cycle high of 2.9% year-over-year. The slight bump in the headline unemployment rate, to 3.9%, was likely related to the labor participation rate falling slightly to 62.7%. But that was offset by the underemployment rate, which fell to 7.4%, a figure not seen since October 2000.

U.S. stocks were off slightly at the beginning of trading and recovered by mid-morning. But the U.S. Treasury yield curve told a different story by flattening decisively; yields between the 3-year and 10-year moved upward by as much as 6.8 basis points (bps); the closely-watched 10-year up 5.84 basis points to 2.931%, and the 30-year rose a smaller 4.05 bps to 3.094%.

The most likely explanation was market logic at its finest: too much positive news about the economy could be a harbinger of even more growth, encouraging the Fed to raise its rates either more, or more frequently in the coming months than its clearly-signaled plan. It’s the prospect of premature tightening, which could hasten the onset of a future recession, that appeared to be the main culprit. That’s a switch from concerns earlier in the week that increasingly confrontational trade negotiations could injure the good times already in progress. Evidence for strength in manufacturing for August was clear, with the Institute for Supply Management (ISM) manufacturing index surprising to the upside at 61.3 and ISM new orders rising to 65.1 from July’s 60.2.1 In fairness, current tariffs could be responsible for the continued high level of the prices paid index, which reached a higher-than-expected 72.1 for the month.

Eurozone: Strong Summer Season Figures for Q2 showed gross fixed-capital investment growing 1.2% vs. Q1, above consensus, supporting the early estimate of GDP growth for Q2 at a healthy 2.1% year-on-year. And despite the pullback in retail sales in July of (0.2%), the year-on-year figure rose 1.1%. Like the U.S., producer prices rose slightly above expectations at 0.4% since June and 4.0% year-on-year. It’s unclear whether this rise was due to increased demand or increasing prices from other suppliers, including imports.

Argentina, Turkey: Talks continue, but with whom? Argentina’s top economic advisers spent most of the week in discussions with International Monetary Fund officials in Washington, looking for ways to support Argentina that would convince financial markets – especially lenders – to resume doing business as before, or better. Meanwhile, Turkey’s central bank stated it wouldn’t make any additional moves before its previously-scheduled September 13 meeting, which it stated would introduce policy adjustments. That announcement may have made matters worse by heightening expectations. Without fanfare, Turkey raised its overnight lending rate by 150 bps and another 150 bps for “late liquidity”, bringing the top rate, but not the overall policy rate, to 20.75%.

Over the past five days, the Turkish lira has actually appreciated by 1.9% to 6.42 vs. the dollar, and the Argentine peso barely moved, now trading at a low-liquidity 36.83 per dollar.

1The Institute for Supply Management’s (ISM) Purchasing Managers Indexes (PMI) for the US manufacturing sector measure sentiment based on survey data collected from a representative panel of manufacturing and services firms. PMI levels greater than 50 indicate expansion; below 50, contraction.

All market-related data Source: Bloomberg, September 6, 2018 unless otherwise stated.

... CHART OF THE WEEK:

Stocks: Homeowner Prudence and Future Consumption

Chart of the week

Source: Bloomberg, 6 September, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

  • By one key measure, it appears that U.S. homeowners have grown cautious about borrowing against the the rising value of their homes.
  • The Mortgage Bankers Association (MBA) tracks U.S. mortgage applications by purpose, showing whether prospective borrowers are looking to buy homes or refinance their existing mortgages. The MBA’s figures show that refinancing applications have been falling in recent years, even as home prices have risen substantially since the depths of the 2008 meltdown.
  • Of course, there are several possible explanations for the fall in applications, including whether banks are actively discouraging refinancing by borrowers with all but the very best credit ratings, or whether interest rates offered by banks for these loans are rising above homeowners’ willingness to borrow.
  • It’s striking that in the first two post-crisis periods when home prices were rising rapidly – in 2009 and 2012- 2013, applications spiked. But since the latter part of 2014, as home prices rose steadily, refinancing applications actually fell.
  • The bottom line: the fall in refinancing while home equity rises may well represent household prudence, which bodes well for current household financial health and potential for future consumption. For stocks, this suggests that the U.S. consumer is well-positioned to support the current consumption-led growth spurt – and the corporate earnings it generates.

The chart:

  • The chart shows, for the ten years between September 2008 and the end of August 2018, applications for refinancing of home mortgages, and year-over-year growth of the the S&P/Case-Shiller U.S. National Home Price Index.

All data Source: Bloomberg, September 6, 2018, unless otherwise specified.


DEFINITIONS:

The S&P/Case-Shiller U.S. National Home Price Index tracks the value of single-family housing within the United States. The index is a composite of single-family home price indices for the nine U.S. Census divisions.

The Mortgage Bankers Association’s (MBA) Refinance Index covers all mortgage applications to refinance an existing mortgage. The Refinance Index includes conventional and government refinances, and is derived from the MBA Weekly Applications Survey, which covers about 75% of all mortgage activity.


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