- The major U.S. markets were mostly down, with the tech–laden NASDAQ losing 3.2%, the small–cap Russell 2000 dropping 3.7% and the S&P 500 retreating 1.0%.
- The large–cap, blue-chip DJIA finished the week flat.
- The news was dominated by the Kavanaugh saga in Washington, but it appeared that the markets didn’t really register any movement because of the drama.
- Investors started the week on a good note, with news on Sunday night that Canada agreed to join the U.S. and Mexico in a new trade agreement. The agreement, known as the United States–Mexico–Canada Agreement, replaces the 24–year-old NAFTA deal but still has to be approved by Congress.
- Volatility returned as the VIX jumped to its highest level since April amidst trade worries with China that are starting to boil.
- The benchmark 10-yr Treasury yield jumped 17 basis points, closing Friday at 3.23% – its highest level since 2011 – while the 2–yr yield jumped five basis points to 2.88%.
- The latest Employment Situation Report pointed to continued strength in the U.S. labor market, reinforcing the Fed's path for raising rates.
- Technology and small–cap stocks led the losses as investors feared that higher rates will slow down the economy.
- In corporate news, embattled General Electric replaced its CEO, Tesla’s Elon Musk settled with the SEC – and then Musk mocked the SEC by calling them the “Shortseller Enrichment Commission;” and Amazon announced it was raising its minimum wage to $15/hour.
Weekly Market Performance
Nafta 2.0, or The United States - Mexico - Canada Agreement
President Trump fulfilled his campaign promise and announced Sunday night that NAFTA would be replaced by the United States-Mexico-Canada Agreement.
In reading the new text of the USMCA, many would conclude that the original foundational pieces of NAFTA will remain largely in place. But proponents of the USMCA suggest that it will increase labor protections, improve access to certain markets, remove barriers to certain trade and bolster reciprocity. Key provisions include:
- Automobiles — Vans, light and heavy vehicles are now subject to more strict rules of origin, requiring at least 70% of a product's value to originate in the U.S., Canada or Mexico in order to benefit from USMCA rules. In addition, 40% of labor used in the region must meet high salary standards.
- Labor standards — The U.S., Canada and Mexico agreed to abide by International Labour Organization standards and to prohibit any imports derived from forced labor.
- Dairy — Canada's dairy, egg and poultry markets are now more open.
The USMCA will be revised every six years, allowing the countries to consistently renegotiate the trade deal and avoid another NAFTA-like scenario wherein a country could threaten to withdraw.
Interest Rates Rise
Yields continue their march upward and this week saw the 10-year Treasury yield push above 3.2% for the first time in seven years. For perspective, the 10–year opened 2018 at 2.4% and has risen steadily since mid–August.
Rates on investment-grade corporate and municipal bonds also rose to their highest levels in several years. The reasons for the rise in interest rates are many, including solid and sustained economic growth.
The question on the minds of stock and bond investors is whether the spike in bond yields this week – the 10–year opened the week at about 3.0% and ended the week above 3.2% – will cause the Federal Reserve to tighten more aggressively this year.
Looking at the 11 S&P sector standings, most of them finished the week in the red. The Consumer Discretionary sector was the worst and got walloped with a 4.4% loss, followed by Real Estate (down 2.7%) and Information Technology (down 2.2%).
The Financial sector, on the other hand, benefited from rising yields and reversed course from the previous week and added 1.5%. The Energy sector did even better, adding 1.9% as oil prices ticked up.
Employment, Trade Balance, & Credit
- September nonfarm payrolls increased by 134,000
- Average hourly earnings increased 0.3%
- The unemployment rate fell to 3.7% from 3.9% in August
- The August trade balance report showed a deficit of $53.2 billion
- The Consumer Credit report for August showed an increase of $20.1 billion