Weekly Market Snapshot

10 December 2018

“I'm sure oil and gas producers in the U.S. are breathing a sigh of relief after the decision.”

- Saudi energy and Industry minister Khalid Al-Falih

... The week in review:

U.S. job growth: Weakened but not weak

Headlines led readers to conclude that November job growth in the U.S. was a major disappointment. But while it’s true that November’s 155k fell short of consensus forecasts and below October’s downward-revised 237k growth, both levels were solidly above estimates of the 100k increase it takes to absorb new entrants to the job market. In addition, average hourly earnings continued the 3.1% year-on-year growth rate of October. The unemployment rate of 3.7%, however, was exactly in line with expectations, and the labor participation rate was unchanged at 62.9%.

Unemployment for workers with high-school but no college (secondary school but no university) reached a new low of 3.5%, but the rate for workers who haven’t completed high school rose, reaching 5.6% in November. For graduates with Bachelor’s degrees or higher, the rate for November was 2.2%.

November’s figures also indicate that the economy continued to pull workers off the bench and into the workforce; workers flowing from “not in the labor force” moving to “employed” is still near its record high three-month moving average.

But the most important reaction to these figures will be seen on December 19th, when the Federal Open Market Committee releases its quarterly economic outlook, revealing their opinions about the course of growth and interest rates for the following year. Over the past week, a rapid change in sentiment has cast doubt on the expectation that the Fed will raise rates as many as three times in the year to come.

Global oil: OPEC steps back

OPEC’s Friday declaration at the end of its Vienna meeting that it would decrease crude oil production by about 900k barrels (bbl) per day over the next four months brought immediate short-term relief to crude markets, with Brent crude spot prices rising as much as 7.5% and hitting US$62.89 as of 11:30 AM ET. The post-meeting comments left the clear impression that Saudi Arabia would decrease its own production to ensure that the cartel, plus its unofficial members, met its joint pullback commitment. The Saudi commitment was especially noteworthy, given the public pressure applied by the U.S. to dissuade Saudi Arabia from helping to boost prices.

U.S. yields: Curveball

Fans of recession signals got their first sighting of a yield curve inversion this cycle when the spread between the 2-year and 5-year Treasury yields fell below zero, making that segment of the Treasury yield curve “inverted”, if only by one basis point (bp) or so. The 3 year-5-year spread joined in, reaching just over -2 bps as of Friday December 7. Explanations vary, but one clear consequence of this week’s inversions is the rising doubt over the Fed’s previously-expected three-hike plan for 2019.

All data Source: Bloomberg, as of December 7, 2018, unless otherwise indicated.

... CHART OF THE WEEK:

EM Bonds: Deep Doubter’s Discount in Currencies

Chart of the week

Chart Courtesy of Western Asset Management. Source: J.P. Morgan, Bloomberg, as of Nov 12, 2018. * Index: J.P. Morgan GBI-EM Global Diversified Index FX Return 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:

  • Between a strong U.S. dollar, headlines about Brazil, Russia, Argentina and Turkey, and the beginning of the end of central bank largesse, investors in Emerging Market (EM) bonds have not had much to celebrate this year.
  • But one notable result of the onslaught has been some of the most heavily-discounted valuations available within the universe of fixed income investing.
  • Clearly, a good part of that discount was a function of falling fundamentals. But as in any heavily discounted asset group, it’s worth asking if the market has become unduly pessimistic – creating potential buying opportunities
  • Consider EM currencies. As of early November, the currency component of EM returns over the past five years – that is, the share of asset class performance affected by the fall of its currencies alone – is down over 35%.
  • That’s one reason Western Asset, in CIO Ken Leech’s quarterly outlook, singles out EM debt as the most undervalued asset class at current levels – the direct result of the current level of skepticism. The deep discount offered by the EM sector thus may merit a second look for investors seeking return as well as diversification.   

The chart:

  • The chart shows, over the past five years as of November 12, 2018, the currency component of global Emerging Market fixed-income securities, as represented by J.P. Morgan GBI-EM Global Diversified Index FX Return.

All data Source: Bloomberg as of November 30, 2018, unless otherwise noted.


DEFINITIONS:

The J.P. Morgan GBI-EM Global Diversified Index FX Return measures the currency component of the return of the J.P. Morgan Global Bond Index – Emerging Market Global Diversified (GBI-EM). The J.P. Morgan Global Bond Index – Emerging Market Global Diversified represents the performance of Emerging Market bonds in all geographies.

The U.S. Federal Reserve, or “Fed,” is 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 Open Market Committee (FOMC) is the Fed's principal policymaking committee.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.

The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.

A basis point is one one-hundredth (1/100, or 0.01) of one percent.


Please note:

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
All investments involve risk, including possible loss of principal.
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.
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.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
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

3 December 2018

[Interest rates] “… remain just below the broad range of estimates of the level that would be neutral for the economy”

- Fed Chair Jay Powell

... The week in review:

Japan: Industrial rebound Preliminary figures for October show Japanese factory output surprising to the upside, rising 2.9% from September’s level, and 4.2% year-over-year -- both well above expectations. Retail trade also rose in October, up 3.5% year-over-year and 1.2% since September. Housing starts rose 0.3% year-over-year in October as well. The year-over-year figures are especially encouraging, since Q3 saw a series of floods and other disasters; the year-ago figures show October’s economy regaining its footing.

However, Japan is far from completely out of the woods; vehicle production fell -5.3% from the year ago level, possibly due to rising tariffs’ construction orders fell -16.5% from the previous year.

China: Figuring growth

The most recent official figures reflect the changing nature of China’s economy. Manufacturing PMI has fallen to the neutral level of 50.0 for November, having reached as high as 52.4 for September 2017. This component pulled the overall “composite” PMI1 figure for November down to 52.8. Non-manufacturing PMI remained above neutral for the month, at 53.4. Industrial profits, however, rose some 3.6% in October year-over-year.

On the financial front, the share of global payments2 made in Chinese yuan for October came in at 1.70%, below September’s level of 1.89%; total foreign exchange reserves fell some 1% to $3.053 trillion as of the end of October, some 7.4% below the year-ago figure.

The Fed: About next year

The positive impact on markets of Fed Chair Jay Powell’s November 28 statements was less about the technical issue of neutral interest rates than about the number and size of the FOMC’s upcoming rate hikes.

Before Powell’s speech, the prevailing opinion, based on previous statements, was that the Fed was anticipating more rate hikes in response of continuing above-trend U.S. growth. Yet based on recent forward-looking data, financial markets had grown increasingly concerned that the economy might not grow in line with the Fed’s expectations. Example: the expected future rate of inflation, as measured by the “break-even” inflation rate, had been falling since July, reaching as low as 1.73% as of November 27, well below the Fed’s stated 2% objective.

Whether or not the FOMC has in fact changed its outlook will likely be revealed on December 19, when the Fed’s widely anticipated rate hike will be accompanied by its regularly-scheduled quarterly economic outlook, which includes, inter alia, projections by individual members of the FOMC about their expectations for rates in the following two years.

Global Trade: Summitry and substance

The G20 economic summit in Buenos Aires was the setting for an unusually large number of negotiations on issues usually settled in advance of these meetings, including U.S.-China tariffs, Brexit, crude-oil production agreements between Russia’s Vladimir Putin and Saudi Arabia’s Mohammed bin Salman, tensions over Russia’s recent military moves in and around Ukraine – not to mention who stands next to whom in the widely-anticipated group photo.

Given that, expectations for headline news from the post-conference consensus communiqué for this session are relatively limited.

1 Definition of PMI goes here

2 Define SWIFT

All data Source: Bloomberg, as of November 30, 2018, unless otherwise indicated.

... CHART OF THE WEEK:

U.S. Economy: Housing’s Hint to the Fed

Chart of the week

Chart Courtesy of Western Asset Management. Source: U.S. Census Bureau, as of 31 Oct 18. 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:

  • Sales of new homes in October came in at a disappointing 544,000 annual rate,3 8.9% below September’s rate4 and down about 24% from its peak level in November 2017.
  • The decline in new home sales is echoed in the figures for single-family building permits and starts, which have also been trending downward to varying degrees for several months.
  • All this has pushed up unsold house inventory, estimated at  7.4 months’ worth of sales at the most recently available sales rate.
  • That’s notably above the normal inventory level of 4 to 5 months seen in periods outside of housing bubbles, according to Western Asset.
  • Recent weakness could be viewed as a sign that the housing market has started to feel the effect of the FOMC’s rate hikes this year, whose stated intention has been to move the central bank’s stance from “accommodative” to a more neutral stance, i.e., neither promoting nor hindering the economy’s presumed natural rate of growth.
  • That signal joins other indications that might influence the Fed to slow the pace of future rate increases -- including a decline in core PCE inflation, the Fed’s preferred gauge, to a 1.78% rate in October.
  • That latest reading continues a pattern of inflation falling short from the Fed’s 2.0% target – a sign growth and inflation may not be rising as quickly as many think. For more detail, explore Western Asset’s thinking on inflation and growth.
  • While financial markets remain convinced that December will see the another Fed rate hike, the accumulation of data on which the FOMC depends could very well be telling the committee – and the markets – that the three hikes expected in 2019 could be less likely to happen than previously believed.
The chart:

  • The chart shows the rates of single-family house sales, building permits and construction starts between January 2013 and October 31, 2018.

3 Source: U.S. Census Bureau. This is the seasonally-adjusted annual rate, taking into account calendar differences as well as other seasonal factors.

4 As part of the October data release, September’s sales rate was revised upward by 8.0%.

All data Source: Bloomberg as of November 30, 2018, unless otherwise noted.


DEFINITIONS:

The Personal Consumption Expenditures (PCE) Price Index, or PCE Inflation, 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 Reserve (Fed) is 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.


Please note:

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.
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

19 November 2018

Brexit Bombs, Oil Retreats

Latest Brexit plan sparks new political turmoil and sends the pound reeling; oil prices pull back sharply amid a glut in light crude supply; Japan's growth falters.

THE WEEK IN REVIEW...

United Kingdom: Brexit Deal Sparks Renewed Volatility 

On Tuesday, UK Prime Minister May signed off on a proposed Brexit deal with the EU that was ill-received even within her own political party; some believe it could fail to receive a majority vote in the House of Commons, the first step toward ratification by Parliament. Two senior ministers resigned on Thursday, which spooked the FTSE 250 index into an intra-day fall as high as 2.65% in the afternoon. Also, over the course of Thursday, the yield on 10-year UK Treasuries (gilts)  fell from 1.46% to 1.36%. As a result, the only certainty on the nation's political and economic future appears to be more uncertainty.

Not surprisingly the flurry of news weighed heavily on the pound, which plummeted as much as 1.7% against the dollar on Thursday. Sterling’s monthly volatility against the U.S. dollar also spiked: while typically range bound between 5-10% over the past five years, it reached 15% on Friday. However, this is still a long way off the 28% volatility seen after the vote in favour of Brexit in June 2016. 

Oil Prices: Long Rise, Sudden Fall

Crude oil saw substantial gains between its February low and October; a barrel of Brent crude, priced at $62 in mid-February, rose to a peak of $86 as of October 3rd, pushed higher by a combination of geopolitical risks, favorable supply-demand dynamics and U.S. sanctions against major oil producer Iran.

Yet most of those gains were lost over the next 5 weeks. By November 13th, it had fallen  to $65 on the back of higher output from U.S. shale drilling, growing U.S. stockpiles of oil and forecasts of slowing demand due to weakening global economic growth. However, prices rebounded to $68 on Friday, over news that supply cuts are likely to be agreed at OPEC’s next meeting on December 6th.

Japan Growth: Two Steps Forward, One Step Back

After a strong 2nd quarter in which Japan's GDP surged at an annualized growth rate of 1.9%, its economy fell sharply to earth in Q3, contracting by an annualized rate of 1.2%.

Much of that can be traced to the one-off effects of some natural disasters (i.e. severe storms, earthquakes), which stifled domestic consumption and factory production. However, more worrisome was a 1.8% decline in exports vs the previous quarter, given the impact of trade tensions and tariff activity on major trading partners. 

Against that backdrop, many expect the aggressive stimulus deployed by the Bank of Japan in recent years in the hope of sparking sustainable growth to continue. Data released by the Bank earlier this week shows that its holdings, swollen by 5 years of aggressive bond-buying roughly equal to the country's annual GDP. 

... CHART OF THE WEEK:

Are interest rates too optimistic?

weekly chart of the week

Source: Bloomberg, as of November 12, 2018. *5-Year, 5-Year Forward Rate. 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 pace of economic growth is likely to have significant bearing on interest rates in 2019.
  • The Federal Reserve’s assessment about growth has been generally upbeat, and that optimism seems to be shared by the bond market.
  • That’s evident in part from U.S. Treasury futures – which suggest a rate scenario notably higher than the Fed’s current estimate of the rate consistent with full employment and capacity utilization, and stable prices – known as the “neutral” or “terminal” rate.
  • Certainly U.S. growth has been strong this year, perhaps creating an optimistic bias in the market for strong growth to continue.
  • But there are reasons to believe that growth could moderate as the fiscal stimulus fades and rate increases begin to bite.

What our managers are saying:

The chart:

  • The chart shows from 12/30/11 – 11/12/18, the 5-year, 5-year Forward U.S. Treasury Rate and the terminal Fed Funds rate, which is the estimate of the “neutral” Fed Funds rate that is consistent with full employment and capacity utilization and stable prices, or with the economy at potential.

All data Source: Bloomberg as of November 15, 2018, unless otherwise noted.


DEFINITIONS:

The 5-year, 5-year Forward Rate is a measure of expected inflation derived from "nominal" Treasury securities and their "real" counterparts—inflation-protected TIPS securities.

The Federal Funds Rate (Fed Funds Rate, Fed Funds Target 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 Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The terminal rate is what economists call the natural or neutral interest rate. It is the rate that is consistent full employment and capacity utilization and stable prices.


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

12 November 2018

“A subsidy is certainly great, but people like me want to get back to work.”

- Clemente Cibelli, unemployed factory worker near Naples, Italy

THE WEEK IN REVIEW...

U.S. producer prices: Heating up? October saw producer prices (i.e. at the wholesale level) climb higher than expected, up 0.6% since September; ex food and energy up 0.5%. For the full year, the increases were 2.9% and 2.6% respectively. Excluding food, energy and trade services, the trailing 12-month rise was a strong 2.8 – solidly above the Fed’s widely-watched 2% objective for overall inflation.

When the consumer price data for October are released on November 14th, observers will have a useful clue to the pricing power of companies now. If higher producer prices are echoed in the consumer figures in October, that could be a sign of healthy overall profit growth in Q4, and of consumer demand strong enough to absorb price rises while still moving higher.

UK growth: Solid in Q3 The Q3 0.6% growth in GDP versus Q2 was the fastest rate in nearly two years, and amplified Q2’s 0.4% increase from Q1. Observers credit household spending, boosted both by a record heatwave and the World Cup in the early part of the summer. This read is consistent with the Bank of England’s assessment that the economy is operating at full capacity, and its plans to raise rates gradually.

Despite the overall positive cast, the monthly figures for the quarter revealed that most of the growth happened before August and September, when the dominant services industry contracted slightly. Further signs of a developing slowdown could be seen in business investment, which fell for a third consecutive quarter in Q3, down -1.20% from Q2, the largest decline in two years. Looking forward, purchasing-manager surveys are indicating expectations of a sharp deceleration in Q4. With Brexit looming large, it’s little surprise that business investment might be slowing due to growing uncertainty about its terms – if a deal with the EU actually takes place.

Venezuela: Currency blues August saw President Nicolas Maduro reconfigure the country’s currency by removing five zeros and reissuing it as the “sovereign bolivar” backed indirectly by the country’s oil reserves. The psychological benefit was large, with the price of a cup of coffee reset to 25 bolivars from 2.5 million. But the country’s hyperinflation appears to be resurfacing, with the price of that cup of coffee increasing to 120 bolivars this week, up nearly 400% since August. This resurgent local-currency inflation reflects the government’s failure to bring the currency into the foreign exchange market in an orderly fashion, resulting in a parallel economy which does business in U.S. dollars instead.

There is one bright spot in Venezuela’s economy: an inflow of foreign exchange. Sadly, that inflow is caused by the mass exodus of millions of Venezuelans, who are sending money back home to support those still in the country .

All data Source: Bloomberg, as of November 9, 2018, 2:20 PM ET.

... CHART OF THE WEEK:

Growth, wages and prices: Tough calls

weekly chart of the week

Courtesy of Western Asset, October 25, 2018. Source: Federal Reserve. as of August 31, 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:

  • With the next Fed rate meeting coming up in mid-December, bond investors are focused on what the Fed might do to slow down a booming economy whose long-term staying power under current challenging conditions has yet to be tested.
  • With average hourly earnings continuing their moderately upward path and inflation remaining muted, the Federal Open Market Committee (FOMC) appears confident in both its optimistic outlook for the economy, and its ability to time pre-emptive rate hikes to ensure that the economy remains stable if wages and inflation should rise faster than expected.
  • In that light, the history of hourly earnings and inflation since 1985 sends a cautionary message, as noted by Western Asset CIO Ken Leech in his recent webcast, summarized in The Continuing Uneven Global Recovery.
  • The Fed’s track record in acting pre-emptively to control employment and prices – its  twin mandates – is arguably mixed.  Specifically, wage growth and inflation have decoupled during several periods of rapid growth, only to re-converge as recessions have followed well-intentioned rate moves.
  • Key cases are the periods before and immediately after the 2000 tech-triggered market decline and the run-up to the 2007-8 global financial crisis, and its unusually muted aftermath.
  • That could be cause for caution going into 2019, as an attempt to pre-emptively dampen inflation presumes that the Fed can know where growth rates and inflation are headed, and what interest rates it would take to dial either of them back in an orderly fashion.

The chart:

  • The chart shows U.S. consumer price inflation and average hourly earnings, for January 1985 to August 31, 2018.

All data Source: Bloomberg as of November 9, 2018, unless otherwise noted.


DEFINITIONS:

The Federal Reserve (Fed) is 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.

US Average Hourly Earnings, Production and Nonsupervisory Workers is calculated by the U.S. Bureau of Labor Statistics on a monthly basis.


Please note:
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.

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.

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.

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

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

5 November 2018

“I’m not seeing anything bad in this jobs report.”

- Jason Furman, former Chairman of the Council of Economic Advisors under Obama

THE WEEK IN REVIEW...

U.S. jobs: Nice! October had more good news for workers. Headline unemployment held steady at a strong 3.7%. Nonfarm payrolls beat expectations, growing at 250K, as did private-sector payrolls, at 246K for the month.

Manufacturing payrolls, carefully watched for the effects of tariffs and trade, grew 32k—twice the expected figure, but small in absolute terms. Underemployment, also politically sensitive, came in at a relatively strong 7.4%, and the labor participation rate beat estimates at 62.9%, a signal that workers are coming off the bench and going back to work.

After an initial upward spike on Friday morning, attributed by many to these jobs figures and stories about impending trade deals with China, U.S. equities settled into mildly negative territory, with the Dow Jones Industrial Average down about 100 points to 25267.76, a little over half a percent. The worst performing stock in the Dow was Apple, down nearly 7% on a disappointing earnings outlook, contributing some (-104) index points to the decline as of late morning. 1

China: Deal in progress? The U.S. trade deficit widened more than expected in September, rising 1.3% from August to $54 billion, a 7-month high. With trade a headline issue ahead of the November 6 election, the U.S. president suggested that key U.S. officials had been asked to begin drafting potential terms for a trade agreement with China, after a “long and very good” telephone conversation with Chinese President Xi. It’s worth noting that the G20 meeting of the leaders of the 20 largest economies is scheduled to take place in Argentina at the end of November, giving Trump and Xi an opportunity to meet without the added pressure of a summit called for the specific purpose of trade negotiations.

Stock volatility: For insights from our managers, read: U.S. Markets Out of Rocket Fuel?, October Volatility and Market Rotation and October Volatility is Not Atypical

Global oil: What embargo? The U.S. worldwide embargo of Iranian oil is scheduled to begin as of this month. Given that, why has WTI crude oil fallen 17% to $63.36 per barrel (bbl) since peaking in early October at $76.41? Ditto for Brent crude ---why down 15.5% to $73.07/bbl over the same period?

First, Saudi Arabia has promised to make up much of the shortfall in global supply. Second, suppliers and customers have had plenty of time to build inventories – including storing crude oil on ships poised to move where needed by refineries. Third, the U.S. is expected to announce waivers for eight countries on Friday, November 2, allowing them to keep buying Iranian crude without fear of sanction. Those countries include major consumers; the two unidentified sources described by Bloomberg News as familiar with the discussions named three of the countries as Japan, India and South Korea, with China in discussions with the U.S. as one of the eight.

1 Source: Bloomberg. Figures for the Dow Jones Industrial Average and Apple Inc are as of 11:36 AM on Friday, November 2.

All data Source: Bloomberg, as of Oct 19, 2018, 2:20 PM ET.

... CHART OF THE WEEK:

Interest Rates: The New Neutral?


Chart of the week

Based on chart created by Brandywine Global. Source: Macrobond, via Brandywine Global (© 2018, Macrobond) which Brandywine Global believes to be accurate and reliable. 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 U.S. and China arguably function as anchors for global growth, given the size and relative stability of their economies. Yet these two nations are trending in different directions, as evidenced by capital market volatility since Q2, the weakness across many emerging markets (EM) and the strength of the U.S. dollar.
  • Both countries continue to see strong growth, with nominal GDP rates2 of close to 6% and 10% respectively. though global growth has slowed somewhat this year3 .
  • But the trajectory of U.S. growth has been upward since 2017, with nominal GDP at post-crisis highs. In contrast, China’s growth trajectory this year has been downward, with nominal GDP growth retreating slightly to below 10%.
  • Brandywine Global ‘s Francis Scotland, Director of Global Macro Research sees this divergence as a major driver of the dollar’s recent strength, the rise in U.S. Treasury yields and the decline in Chinese bond yields – and of the movements of the U.S. dollar price of the Chinese offshore yuan.
  • In EM economies, Scotland notes that this combination, in concert with higher oil prices, has proved overwhelming.
  • The backdrop of U.S. – China relations may be a part of the picture, according to Scotland. “The impact of the trade war on global growth is hard to calibrate, but it seems to have exaggerated the growth divide even more.”
  • That’s why policy changes in either country which affect their relative growth could be key components of the behavior of financial markets over the next year. According to Brandywine Global’s Scotland, “In our view, policy differences are the main drivers between America and China”.

The chart:

  • The chart shows the growth rates in nominal GDP for the U.S. and China for the years 1999 through June 30, 2018.

2 Nominal GDP is defined as growth in GDP before taking inflation into account. This can differ from inflation-adjusted GDP figures, which are often described as “real GDP”.

Source: Brandywine Global, based on J.P. Morgan Global Composite PMI

All data Source: Bloomberg as of November 1, 2018, unless otherwise noted.


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.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.


IMPORTANT INFORMATION:

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.

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

29 October 2018

Insights from Legg Mason's investment managers on current stock volatility; another strong quarter for U.S growth; Brazil's election signals changes ahead
“I never felt I did anything because of pressure from other people”

- Former Fed chair Janet Yellen

... The week in review:

Stock volatility For insights into current market instability, read: U.S. Markets Out of Rocket Fuel?, October Volatility and Market Rotation and October Volatility is Not Atypical

U.S. Growth: Still Muscular The U.S. economy grew at a better-than-expected 3.5% annualized rate in 3Q, supported by strong consumer spending, inventory-building by businesses, and strong government spending. That made for the strongest 2-quarter growth rate since Q2 and Q3 of 2014.

Consumer spending, which makes up about 70% of the economy, surprised by accelerating a full 4%, more than making up for the relatively soft 0.8% gain in non-residential business development.

One key figure: the relatively small 1.6% growth rate of the core personal consumption price index. This figure could weigh heavily of the current lively debate about the Fed’s plans for rate hikes: if prices aren’t rising as quickly as expected, that adds weight to the “dovish” argument that the FOMC should be less rather more aggressive about rate hikes.

Financial markets appeared unimpressed; as of 10:00 AM ET, U.S. equity indexes were trading downward, with the Dow Jones Industrials falling some 375 points to 24,600 (-1.5%), the NASDAQ down over 2.75% to 7110.65. The U.S. Treasury yield curve steepened yet again, with 10-year Treasuries falling about (-4) basis points (bps) to 3.08% while the 30-year fell a smaller (-2.6) bps to about 3.32%.

Brazil: Runoff election Polls suggest that the result of Sunday’s runoff election will be a victory for controversial political outsider Jair Bolsonaro. poised to benefit from widespread political and economic discontent stemming from corruption scandals and weak growth.

The country’s currency has strengthened since Mr. Bolsonaro’s victory in the first round on October 7; the Brazilian real is up some 5% since the election, to 3.68 to the U.S. dollar. Yields of Brazil’s 5-year government bonds have fallen from 10.53% to as low as 9.3% - a rare result amid this year’s emerging market rout. While part of the credit may go to the country’s jump in soybean exports as a result of the U.S.–China trade spat, hope for an end to the country’s misery may be more pertinent.

All data source: Bloomberg, October 26, 2018, 10:00 AM ET, unless otherwise indicated.

... CHART OF THE WEEK:

U.S. Stocks: Earnings Power Forward

Chart of the week

Source: Bloomberg, 25 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:

For investment insights on current market volatility, explore QS Investors on October's volatility and market rotationand ClearBridge Investors on potential opportunities from current market conditions

  • Whatever the causes of the volatile stock market in 2018, rising corporate earnings have been more a source of support than a cause for worry.
  • It’s certainly true that this quarterly earnings season has seen a small number of high-profile earnings shortfalls, including 3M, Caterpillar and now Amazon.
  • But other bellwether companies such as Boeing, United Technologies and Netflix have seen earnings strongly exceed expectations.
  • Indeed, among the 229 companies in the S&P 500 that have reported thus far, earnings have exceeded expectations by an average of 6.15%1, with none of the 11 sectors of the index reporting net disappointments.
  • Perhaps more importantly, aggregate earnings forecasts for the S&P 500 have risen strongly all year, up some 11.4% since early January.
  • So there are arguably better reasons to explain the skittish tone of the markets, including the prospect of higher rates worldwide; global trade tensions; potential challenges to China’s breakneck growth; the rekindling of military rivalries between Russia and Nato, and more.
  • But remember that the S&P 500 eventually recovered from its 11.4% downdraft in February when earnings expectations continued to climb, as they are doing today.
  • Though negative surprises can unfold anytime, when stocks decline in the face of improving fundamentals, astute active investors may be able to take advantage of lower prices.

The chart:

  • The chart shows the price and forward earnings for the S&P 500 Index between January 2 and October 25, 2018.

1 Source: Bloomberg, as of close of business on October 25, 2018.


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.

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 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.

Forward earnings are a stock’s (or index’s) estimated earnings per share (or estimated index earnings), usually one-year ahead.


IMPORTANT INFORMATION:

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.

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