Week in Review

US Government Funding Deadline Looms

A review of the week's top global economic corporate and earnings news. 

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For the week ending 19 January 2018

  • Senators at odds over stopgap funding measure
  • US–China trade friction up, NAFTA exit mulled
  • Bank of Canada raises rates, expresses NAFTA worries
  • US labor market tightens further

Global equities reached record levels at midweek amid continued evidence of synchronized global growth and solid corporate earnings. Yields on US 10-year Treasury notes rose to their highest level since March of 2017, trading at 2.62% on Friday morning. Oil markets were little changed, with West Texas Intermediate crude consolidating recent gains around $63.50 a barrel. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), jumped to 12.25 from 10 a week ago.

MACRO NEWS

US government shutdown looms
The US government’s funding authority will run out at midnight tonight if 60 members of the Senate cannot agree on a stopgap deal to fund continuing operations. Republican senators are largely pushing for an agreement that will fund defense priorities long-term while Democrats are focused on protections for young immigrants brought to the United States unlawfully. On Thursday, the House of Representatives passed a bill that would fund the government for another 30 days, but the Senate has yet to take up the measure. A short-term shutdown is seen as being minimally disruptive to markets, but a long-term shutdown could prove more unsettling.

Spotlight grows on trade friction
With another round of NAFTA (North America Free Trade Agreement) negotiations set for next week and several US Department of Commerce investigations into Chinese trade practices winding up soon, markets are beginning to grow concerned that escalating trade tension could weigh on investor confidence. US president Donald Trump made pointed remarks this week on trade, saying that his preference is to pull the US out of NAFTA to increase leverage in negotiations with Canada and Mexico, though his advisors counseled against that course of action. Trump also suggested China could be subject to large fines as a result of intellectual property theft. Investors fear tit-for-tat trade sanctions will disrupt a period of unusually synchronized global economic growth.

Bank of Canada ups rates
The Bank of Canada raised its short-term policy rate for the third time since mid-2017 on Wednesday, taking it to 1.25%. Many Canadians carry variable rate mortgages, so rate hikes tend to have a significant short-term impacts on consumers. BOC Governor Stephen Poloz said unexpectedly strong economic data spurred the rate hike and signaled that additional tightening will likely be needed. However, Poloz warned of a strong negative impact given the NAFTA agreement’s uncertain future. Particularly negative impacts would be felt from a decline in business investment if NAFTA were to collapse, the governor said.

US jobless claims fall to 45-year lows
Weekly US jobless claims fell to 220,000 in the week ending 6 January, the lowest reading since 1973, when the US population was far smaller than today. The US Department of Labor reported last Friday that the US unemployment rate held steady at 4.1% In December.

IEA: US oil output could surpass Saudi Arabia's this year
The Paris-based International Energy Agency forecast this week that US crude output could surpass 10 million barrels a day in 2018, which would put US production ahead of that of Saudi Arabia and rival that of Russia, provided the OPEC-led production caps remain in place this year. The IEA expects a wave of US shale production to come on line this year in response to higher global oil prices. US production in 2017 was the highest in nearly 50 years, the IEA reported.

ECB may tweak guidance in March
While the European Central Bank is set to meet next Thursday, any move to tweak its forward guidance on the future path of monetary policy will likely wait until the March meeting, according to press reports this week. While the eurozone economy continues to grow strongly, inflation remains well below the ECB’s target of near 2%. Recent strength in the euro exchange rate has been a further inflation headwind, which has prompted ECB vice president Vitor Constancio and several other members of the Governing Council to comment that the euro’s recent rally doesn’t reflect fundamentals.

EARNINGS NEWS

Earnings season underway
As of 17 January, 12% of S&P 500 companies have reported Q4 earnings. Earnings are expected to increase 12.2 versus the same quarter a year ago, while revenues are expected to rise 7%. Seventy-eight percent of companies that have announced earnings to date have beaten analysts’ expectations, while 81% have beaten revenue expectations.

THE WEEK AHEAD 

Date

Country/Area

Release/Event

Tue, 23 Jan

Japan

Bank of Japan interest rate announcement

Tue, 23 Jan

eurozone

ZEW economic sentiment survey, consumer confidence

Wed, 24 Jan

global

Flash purchasing managers' indices

Wed, 24 Jan

United Kingdom

Unemployment rate

Wed, 24 Jan

United States

Existing home sales

Thu, 25 Jan

eurozone

ECB interest rate announcement

Thu, 25 Jan

Canada

Retail sales

Fri, 26 Jan

US

Q4 gross domestic product, durable goods orders

Fri, 26 Jan

Canada

Consumer price index

 

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com. 

Past performance is no guarantee of future results. 

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg New; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com. 

This content is directed at investment professionals only.

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