Daily Market Color

Stocks, Treasury Yields Rise as WEF Wraps Up

Nothing But Positive Vibes in Davos

Risk assets surged during today’s trading session, lifted by a combination of positive earnings reports and optimistic rhetoric from world leaders at the World Economic Forum in Davos, Switzerland.  All three major US stock indices climbed to new record highs, as the DJIA jumped 0.85%, S&P 500 rose 1.2% and Nasdaq surged 1.30%, driven by the tech and healthcare sectors.  Treasury prices declined on the day, with yields/swap rates rising 3-6 bps across the curve, bringing the yield on the 10-year note back to where it started the week at near 2.66%.  The US dollar fell 0.3% against major currencies on the day to a new three-year low, concluding a volatile week spurred by comments from Treasury Secretary Steven Mnuchin and President Trump.  The Japanese yen recorded one of the largest gains against the dollar (+0.75%) after a speech from BOJ Governor Haruhiko Kuroda at Davos presented a bullish tone for 2018 consumer price growth in Japan.   



Headline GDP Disappoints

While the headline number of the fourth quarter GDP data release was viewed as a disappointment, there were some positive aspects to the report.  Q4 GDP came in at 2.6% annualized growth, missing median expectations of 3% and a relatively steep dropoff from the prior quarter’s 3.2% post.  On the upside, consumer spending, which represents the largest part of the US economy, rose at a 3.8% annualized rate.  In addition, business equipment investment was up an annualized 11.4%.  Also detailed in the data, the trade deficit widened as imports rose two times the rate that exports rose and was responsible for taking 1.13% from growth of GDP.  Looking ahead, there will be two more revised Q4 GDP estimates released in the coming months as more information is presented.



Defense Spending Could Deepen Deficit

The 2019 budget is expected to include a request for $716 billion in defense spending — this is a significant increase (4.8%) from 2018 when $683 billion was budgeted for defense spending.  This increased spending signals a shift from the strategy of the military’s efforts to fight terrorism and insurgencies to preparing for a larger scale conflict with other world powers and upgrading weapons systems.  Also important to note is that this could be a significant change in the approach to running a deficit, as 2019 is expected to bring in less revenue for the government as a result of the recently passed tax plan.


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