Positive developments on the U.S. budget and trade negotiations underpinned a solid week of gains, though mixed economic data tempered investors’ enthusiasm.
Investors found reason to add risk to their portfolios after early-week reports out of Washington indicated a border security deal had been reached, paving the way for a budget agreement that would avert a second government shutdown. The news, along with separate comments from President Trump that the March 1 trade deal deadline could be pushed back if sufficient progress is made in this week's negotiations, helped spur a Tuesday rally that drove the S&P 500 Index above its 200-day moving average, a key technical support level, for the first time since December 3. Subsequent reports later in the week that trade negotiations were indeed productive helped add to gains. Some key economic data gave investors pause after retail sales for December came in well below expectations, while sagging motor vehicle production led overall manufacturing output to its steepest drop in eight months.
Elsewhere, oil recouped last week’s declines after reports surfaced that Saudi Arabia is mulling further output cuts. A pause in the dollar’s recent run-up, along with lackluster economic data, buoyed gold prices and pressured 10-year Treasury yields, which ended the week slightly lower.
Overseas, a rift of economic data showed Europe’s economy continues to slow. Getting past the auto production drag from tougher auto emissions rules, a likely better global trade environment, and Brexit clarity may help European growth pick up a bit in the coming months but achieving even 1.5% gross domestic product (GDP) growth in 2019 may be a stretch. Data out of China and Japan fared better. Chinese exports rose more than expected (a positive global economic signal) while imports fell less than expected. Japan, meanwhile, saw its GDP rebound in the fourth quarter, but growth was inflated following the contraction in Q3 amid weather disruptions, suggesting the pace may slow a bit going forward and is unlikely to get any better than 1% in 2019. On the investing environment in Japan, LPL Chief Investment Strategist John Lynch said, “Japan remains a more attractive investment option to us among foreign developed equities, but we still recommend more tactical-oriented investors look to emerging markets for foreign exposure.”
The week ahead is a shortened one due to the observance of Presidents’ Day on Monday, but investors will get some top-tier economic data including minutes from the Federal Reserve’s most recent policy meeting, along with durable goods orders, Purchasing Managers’ Indexes, and leading economic indicators. Abroad, consumer inflation readings out of the Composite Eurozone and Germany headline the docket. Track these and other important events on our Weekly Global Economic & Policy Calendar.
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