before the bell · 2018-10-08 · before the bell morning market brief october 8, 2018 ... by fed...

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• For further information on any of the topics mentioned, please contact your Financial Advisor. • Unless specifically stated otherwise, comments contained in this document should not be construed as an investment opinion or

recommendation of any securities mentioned. Charts depicted are from FactSet unless otherwise noted. ____________________________________________________________________________________________________________________________ © 2018 Ameriprise Financial, Inc. All rights reserved. of 13

Before the Bell Morning Market Brief

October 8, 2018

FOR IMPORTANT DISCLOSURES, PLEASE SEE THE DISCLOSURE PAGES AT THE END OF THIS DOCUMENT

MONDAY MORNING MARKET STRATEGY: David M. Joy, Chief Market Strategist Yields on treasury securities surged higher last week in response to a round of solid economic reports and comments by Fed officials about the future path of interest rates. The ten-year Treasury note began the year at a yield of 2.41 percent, and by the middle of February had climbed to 2.95 percent. Except for a brief spike to 3.11 in mid-May, the yield remained in a tight band between roughly 2.80-3.00 percent for the better part of the next six months. But after Fed Chairman Powell’s speech at Jackson Hole in late August, the yield began a steady climb from 2.80 to 3.06 percent by the middle of last week. Then the lid came off. Over just the last three days of last week, the yield suddenly surged higher to close at 3.23 percent. It is the highest level on the ten-year since 2011. The yield spike followed comments from Powell on Wednesday that the Fed intends to continue raising rates at a gradual pace, but would do so more aggressively should inflationary pressures rise. Powell also indicated that the fed funds rate at present was likely a long way from neutral.

These remarks were preceded by the ISM non-manufacturing survey which rose to its highest ever reading in the relatively short history of the survey. Coupled with the previously released manufacturing survey it showed that the economy was not only performing well, but possibly firming. And Friday’s September jobs report likely did nothing to suggest otherwise. Although the total number of new jobs created was less than expected, the upward revision to the August total more than compensated. And the unemployment rate fell to a five decade low at 3.7 percent, suggesting that whatever slack remains in the labor market continues to diminish. The year-over-year rise in average hourly earnings remained at a manageable 2.8 percent, reinforcing Powell’s observation that wage pressures were not yet resulting in rising inflation.

Equity markets were spooked by the sudden climb in bond yields. The S&P 500 shed 1.0 percent on the week, with most of the damage coming on Thursday and Friday. It was the second weekly drop in a row for the first time since June. And it was a week in which the previous winners were replaced by the laggards. Sharp losses in consumer discretionary, technology, communication services and real estate were supplanted by solid gains in financials, utilities, and energy.

The price of oil continued its steady march higher last week. West Texas Intermediate added another $ 1.09 a barrel to close at $74.34. WTI has risen 10 percent in just the past four weeks, after beginning the year at $58.38 a barrel. The dollar rose for the second straight week as well.

In the absence of evidence of firming inflationary pressures, last week’s move in yields can be considered in part a response to evidence of firming growth. New York Fed President Williams made that very point in a speech on Friday.

Before The Bell October 8, 2018 ____________________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________ © 2018 Ameriprise Financial, Inc. All rights reserved. of 13

Market-based indicators of inflation have barely moved. The September CPI report this week will provide the latest reading on prices. And the 2-10 year yield curve widened to 34 basis points last week, up from 24 the prior week, taking some pressure off worries over a possible yield curve inversion. But even if the move in rates is a growth and not inflation story, at some level equity prices are likely to come under increasing pressure, as bonds become relatively more attractive, and air comes out of equity valuations. One development that may bear watching, was last week’s rise in high yield credit spreads. After hitting a ten-year tight last Wednesday at 316 basis points, the option-adjusted spread between the B of A Merrill Lynch High Yield index and the ten-year treasury jumped to 332 by week’s end.

Earnings take center stage this week as third quarter reporting season gets underway. According to Factset, earnings growth of 19.2 percent is expected. That is down slightly from when the quarter began, a modest reversal from the experience of the first two quarters. Of particular interest will be what managements have to say about the trade war with China and its impact on both input costs and supply chains.

Stock markets in mainland China reopened on Monday after a week-long holiday, and the results are ugly. The Shanghai Composite fell 3.7 percent on the day, as participants catch up with developments elsewhere. Japanese markets are closed on Monday, but the weakness has extended to early trading in Europe, where stocks are lower across the board. U.S. futures are pointing to a modestly lower open.

Lastly, the Congressional Budget Office updated its report for the 2018 fiscal year, estimating a deficit of $782B, some $116B higher than in fiscal 2017. That equates to 3.9 percent of GDP, up from 3.5 percent in the prior year. Backing out shifts in the timing of certain payments, the deficit would have totaled $826B, or $166B higher than last year. That would equate to 4.1 percent of GDP.

MORNING MARKET COMMENTARY: Anthony M. Saglimbene, Global Market Strategist • Quick Take: U.S. futures are pointing to a weaker open; Europe is trading lower; Asia finished lower overnight;

West Texas Intermediate (WTI) oil trading at $73.35; 10-year U.S. Treasury yield at 3.23%.

• Interest Rates Move Higher — Now What? Last week, the S&P 500 Index fell 1.0%, while the Dow Jones Industrial Average hit an all-time high on Wednesday, finishing the first week of the fourth quarter essentially flat. However, selling pressure was most acute in the NASDAQ, where the tech-heavy index tumbled 3.2%. Month-to-date, Consumer Discretionary has slumped 4.4%, with Real Estate, Information Technology, and Communication Services all lower by more than 2.0%. Outside of Real Estate, the largest gains this year have been in Tech, Discretionary, and Communication Services, so investors shouldn’t be shocked that money was pulled more quickly out of these sectors last week. Small-cap U.S. stocks have also taken it on the chin to start the final quarter of 2018, with the Russell 2000 Index lower by 3.8% in October. Small-cap stocks have suffered since North American trade tensions have cooled, a replacement agreement for NAFTA has been formed, and large-cap Energy and Industrial stocks started to rebound over the last month.

• A spike in the 10-year U.S. Treasury from 3.06% on Tuesday to 3.23% by the close of Friday was widely cited as the culprit for the pain across stocks last week (see the first embedded FactSet chart for more detail). Importantly, the yield on the 10-year is now approaching a full percentage point higher than where it entered the year. The ‘average’ 10-year yield in 2018 and ‘current’ yield are well above last year’s level. It’s important to note, the yield on the 10-year Treasury is a benchmark rate for a wide variety of purposes across the market and economy. Simply said: As the rate on the 10-year has climbed this year, housing, auto, and credit card loans have become more expensive for consumers. On the margin, the higher risk-free rate could also dampen investor enthusiasm for certain types of stocks, and over time, lower the multiple they are willing to pay for a future stream of earnings.



• Getting back to last week, rising oil prices, increasing trade tensions with China, and concerns over lower earnings guidance by U.S. companies on their upcoming Q3’18 earnings calls bubbled below the surface. Italy’s higher than expected budget deficit for next year and European Union (EU) anxiety about the dearth of fiscal restraint coming out of Rome at the moment was also a modest headwind for markets last week. As a result, Asian and European equity markets experienced larger declines, despite investors’ more immediate focus on U.S. markets. As we have said in the past, during times of sudden stress, money favors the home team. Despite a market sell-off last week precipitated in the U.S., domestic stocks outperformed the rest of the world. The theme of U.S. outperformance is a trend that’s been in place all year and was unaltered by last week’s events.

• So, what’s next on the horizon? Where are markets headed and what does it mean for investment portfolios? Below we list some points to consider and guidance to help ground investment decisions over the coming weeks and months.

“When interest rates go up, they tend to spike higher in one big swoop,” says Ameriprise Fixed Income Strategist, Brian Erickson, CFA. As a result, equity markets typically react negatively over the near-term to this change in rates. From a Global Asset Allocation Committee perspective, we believe the 10-year U.S. Treasury yield could temporarily climb to 3.5%. If this happens, equity markets are susceptible to further downside.

Nevertheless, we do not believe the 10-year yield would stay at such a level without considerable evidence that inflation levels across the economy were substantially moving beyond current expectations. Such inflation readings would also have to be ‘hot’ enough to prompt the Federal Reserve to hike interest rates more than what is discounted by markets. Although we believe inflation levels could modestly rise over the coming quarters, we see no visible evidence that inflation is surging.

Based on the strength in the economy and the Federal Reserve’s desire to normalize interest rates, we believe the 10-year yield could ultimately settle somewhere between 3.12 and wherever it finds its new high. Bottom line: yields below 3.0% are very unlikely through the rest of this economic cycle. Importantly, the Fed is continuing to reduce its balance sheet at the same time the U.S. must fund its fiscal deficit spending. More Treasury supply flooding the market also means higher interest rates.

Speaking of the economic cycle, the current U.S. economic expansion will be the longest on record if it makes it to July 2019, as the embedded BCA Research chart helps to illustrate. Recession indicators are not flashing immediate warning signs; neither is unemployment rising or spending slowing. In fact, a current 3.7% unemployment rate is the lowest since December 1969. And on the spending side, fiscal stimulus is in full swing, capital expenditure levels are rising, and consumers are finally loosening their purse strings. We expect holiday spending to be strong this year, as a low unemployment rate and high consumer confidence add to the holiday cheer.



Q3’18 S&P 500 earnings per share (EPS) are set to grow by roughly +21.0% y/y. Yes, companies may provide some negative outlooks on trade, but the impact on full-year 2018 EPS should be manageable. Yet, S&P 500 earnings growth is slowing. Analysts expect EPS growth to be cut in half next year, compared to the +20.0% full-year growth anticipated for 2018. The fading effects from last year’s tax cuts and moderation in analyst corporate growth expectations are largely responsible for the reduction in 2019 EPS estimates. In our view, lower earnings growth and rising yields could create some headwinds for stock prices next year. If companies can meet analysts’ EPS estimates for next year, we believe equities could continue to trend modestly higher over the next twelve months.

Nevertheless, investors should expect market volatility to increase over the coming weeks and stock prices to face more headwinds if interest rates continue to rise. With that said, investors should keep a level head, and maintain the course when it comes to implementing a diversified portfolio. Diversification across equities, fixed income, and alternatives can mitigate the impact on portfolios when sharp/sudden declines in stocks occur. That may not be as apparent when the S&P 500 is going straight up as it has since the February lows. But diversification works when equities start to head south. Longer-term, this is the only strategy that investors can routinely count on to keep them invested throughout cycles and reduce the ill-effects of poor timing decisions.

Keep this in mind: The U.S. economy is strong, labor conditions are tight, confidence is high, and corporations are earning at rates they haven’t seen in over a decade. This environment should continue through next year, which could keep U.S. equities biased to the upside. But to be clear, the rate at which equities advance higher could slow next year and every tick higher in interest rates may make it more difficult for riskier asset prices to climb. Over the coming weeks and months, we suggest investors start reviewing their portfolios and aligning their investments back to their longer-term strategic targets. We expect modest gains for equity prices in 2019 and volatility to increase as trade tensions with China escalate. Investors would be wise to start adjusting portfolios to that environment sooner, rather than later.

• Asia-Pacific: Asian equities closed lower on Monday. On Sunday, the People’s Bank of China (PBoC) cut its reserve requirement ratio (RRR) by one percentage point. Though the cut in the RRR was expected, the magnitude was more than most predicted. Based on the PBoC statement, the liquidity provided by the RRR cut will be used to repay medium-term lending facility loans due to mature at the middle of this month. The central bank was explicit in its statement that the interest rate move was made to support a prudent and neutral policy stance and not a “deluge of stimulus.” Further, the central bank said the cut was targeted to help banks and markets and would not put downward pressure on the yuan. On a related note, China’s Foreign Minister told U.S. Secretary Mike Pompeo that recent actions from the White House have “directly impacted the mutual trust and cast a shadow over bilateral relations with the U.S.” The Wall Street Journal highlighted that tariffs applied by the White House on China are being used to change behavior, not just as a negotiating tactic like with other countries. The article noted that the Trump trade team believes U.S. firms need protection from Beijing’s efforts to coerce technology and advance its global footprint. All told, the Trump Administration is attempting to change U.S. company behavior by making it more



expensive for companies to export from China. The hope is that more lasting tariffs on China will encourage U.S. companies to find other areas from which to produce or export their goods.

• Europe: Markets in the region are trading in the red at midday. The 10-year Italian bond yield rose to its highest level since 2014. Broadly, Italian assets are under pressure today after the European Commission rejected the government’s budget deficit proposals on Friday. The move now increases the risk of a showdown between Rome and Brussels ahead of the official review by the European Union (EU) next week. Italian Deputy Prime Minister Di Maio and head of the populist Five Star Movement said Italy would stick to its budget proposals.

• U.S.: Equity futures are pointing to a weaker open this morning. As The Wall Street Journal pointed out, a 5.0% yield on the 10-year U.S. Treasury has historically been an inflection point for stocks. But after a decade of near-zero rates and extreme monetary policies, 3.5% on the 10-year could mark the turning point for stocks this time around. As we highlighted above, stocks would most likely see further selling pressure if the 10-year climbed to such a level. However, for that level to be sustained for a prolonged period, investors will need to see further evidence of inflation across the economy. It’s also important to note that global buyers would most likely be attracted to such a high comparative yield versus other global risk-free rates. With a growing supply of Treasures coming to market over the next year, U.S. government bond investors may require a more competitive yield going forward. Separately, September PPI (Wednesday) and CPI (Thursday) will be closely watched by investors for evidence of growing inflation. We suspect the 10-year as well as global equity markets to be very sensitive to how the data comes in. Lastly, Homeland Security backed claims by Apple, Inc. and Amazon.com, Inc. denying allegations made in last week’s Bloomberg report saying China used tiny chips to spy on U.S. tech firms. According to Reuters, Apple told Congress on Sunday it found no sign of suspicious transmissions or other evidence that it had been hacked.

WORLD CAPITAL MARKETS (all data as of approximately 8:00 AM ET)

Americas % chg. % YTD Value Europe (Intra-day) % chg. %YTD Value Asia/Pacific (Last Night) % chg. %YTD Value

S&P 500 -0.55% 9.52% 2,885.6 DJSTOXX 50 (Europe) -0.92% -2.41% 3,314.8 Nikkei 225 (Japan) closed 6.18% 23,783.7 Dow Jones -0.68% 8.83% 26,447.1 FTSE 100 (U.K.) -0.77% -2.32% 7,262.1 HK Hang Seng ( H. Kong) -1.39% -9.57% 26,202.6 NASDAQ -1.16% 13.75% 7,788.4 DAX Index (Germany) -1.00% -7.18% 11,990.2 Korea Kospi 100 -0.60% -8.29% 2,253.8 Russell 2000 -0.90% 7.30% 1,632.1 CAC 40 (France) -1.01% 2.62% 5,305.2 Singapore STI -0.88% -3.32% 3,181.5 Brazil Bovespa -0.76% 7.75% 82,321.5 FTSE MIB (Italy) -2.40% -9.13% 19,858.2 Shanghai Comp. (China) -3.72% -15.88% 2,716.5 S&P/TSX Comp. (Canada) closed 0.62% 15,946.2 IBEX 35 (Spain) -0.69% -5.75% 9,190.2 Bombay Sensex (India) 0.28% 2.24% 34,474.4 Mexico IPC -1.29% -1.13% 48,052.9 Russia TI -1.22% 12.36% 4,374.3 S&P/ASX 200 (Australia) -1.38% 5.26% 6,100.3

Global % chg. % YTD Value Developed International % chg. %YTD Value Emerging International % chg. %YTD Value

MSCI All-Country World Idx -0.68% 2.37% 514.7 MSCI EAFE -0.75% -3.30% 1,927.1 MSCI Emerging Mkts -0.95% -11.63% 1,000.8 Note: International market returns shown on a local currency basis. Equity index data is total return, inclusive of dividends.

S&P 500 Sectors % chg. % YTD Value Equity Income Indices % chg. % YTD Value Commodities Consumer Discretionary -0.78% 15.34% 897.2 JPM Alerian MLP Index 0.00% 1.71% 28.0 Futures & Spot (Intra-day) % chg. % YTD ValueConsumer Staples -0.17% -4.21% 549.9 FTSE NAREIT Comp. 0.01% -1.23% 17,081.7 CRB Raw Industrials -0.23% -6.23% 482.4 Energy -0.04% 9.46% 571.4 DJ US Select Dividend 0.22% 4.64% 2,069.7 NYMEX WTI Crude (p/bbl.) -1.55% 21.14% 73.2 Financials -0.42% 1.69% 465.1 DJ Global Select Dividend -0.75% -7.25% 230.6 ICE Brent Crude (p/bbl.) -1.51% 23.96% 82.9 Real Estate -0.02% -1.08% 196.4 S&P Div. Aristocrats -0.12% 5.74% 2,605.7 NYMEX Nat Gas (mmBtu) 3.15% 9.79% 3.2 Health Care -0.09% 15.70% 1,092.3 Spot Gold (troy oz.) -1.48% -8.98% 1,185.8 Industrials -0.49% 5.64% 664.1 Spot Silver (troy oz.) -1.94% -15.27% 14.4 Materials -0.81% -3.23% 361.3 Bond Indices % chg. % YTD Value LME Copper (per ton) -1.93% -14.43% 6,167.0 Technology -1.27% 17.97% 1,292.5 Barclays US Agg. Bond -0.18% -2.53% 1,994.7 LME Aluminum (per ton) -1.87% -5.70% 2,127.5 Communication Services -1.04% -1.46% 157.0 Barclays HY Bond -0.19% 2.12% 1,991.3 CBOT Corn (cents p/bushel) -0.54% -4.62% 366.3 Utilities 1.57% 4.62% 272.2 CBOT Wheat (cents p/bushel) -0.62% 7.42% 517.8

Foreign Exchange (Intra-day) % chg. % YTD Value % chg. % YTD Value % chg. % YTD ValueEuro (€/$) -0.5% -4.5% 1.15 Japanese Yen ($/¥) 0.28% -0.63% 113.40 Canadian Dollar ($/C$) -0.4% -3.3% 1.30 British Pound (£/$) -0.6% -3.5% 1.30 Australian Dollar (A$/$) 0.04% -9.60% 0.71 Swiss Franc ($/CHF) -0.2% -2.0% 0.99 Data/Price Source: Bloomberg



THE WEEK AHEAD: Russell T. Price, CFA • The pending Q3 reporting season. The third quarter earnings release season gets off to a slow start this week.

According to FactSet, just 7 S&P 500 companies (including one member of the Dow Jones Industrial Average) are scheduled to report over the next five days. The earnings calendar this week is most prominent on Friday when four of the nation’s largest financial institutions unofficially kick-off the earnings season with what are always very highly anticipated reports.

• According to FactSet, companies of the S&P 500 are expected to post year-over-year (yr/yr) earnings per share growth (EPS) of 19.0% for the period (versus +25% in Q2) on sales growth of 7.2% (versus 10.1% in Q2).

• At the start of the period (June 30th) estimates for Q3 were for EPS growth of 20.4%, according to FactSet, but a decline for the current period is normal during any given reporting season. Over the past 5 years the average current quarter adjustment is -3.2%, so the -1.6% seen for Q3 is smaller than the than the recent average. The adjustments, however, may be a little more difficult to follow given the recent re-alignment of the S&P 500 sector classifications.

• The moderation in yr/yr growth expectations for both sales and earnings versus first half averages is reflective of rising headwinds for corporate America. Economic expansion outside the U.S. has slowed slightly over the last several months and trade and tariff actions have made for more difficult operating environments for multinational corporations.

• Further, a rebound in the value of the stronger U.S. dollar should also directly pressure financial results as sales and profits generated in foreign lands are likely to convert into fewer U.S. dollars for financial reporting purposes. After a downdraft in the dollar’s trade-weighted value in the first quarter which carried over into the second quarter, the dollar has generally moved higher since. The U.S. dollar is 2.3% higher year-to -date against a trade-weighted basket of major currencies but 5.8% higher since its late January lows.

• The economic calendar is all about inflation this week. The week begins however with the National Federation of Independent Businesses’ (NFIB) Small Business Optimism Index. The Index is particularly notable given that it reached a new high for its 45-year history in hitting 108.8 in August. Forecasters as polled by Bloomberg think the Index can go even higher in September with a consensus view of 109.

Ameriprise Global Asset Allocation Committee Global Equity Region - Tactical View

MSCI All-Country GAAC GAAC MSCI All-Country GAAC GAACWorld Index GAAC Tactical Recommended World Index GAAC Tactical Recommended

Region Weight Tactical View Overlay Weight Region Weight Tactical View Overlay Weight

1) United States 55.1% Overweight +5.0% 60.1% 5) Latin America 1.2% Equalweight - 1.2%

2) Canada 3.0% Underweight - 1.0% 2.0% 6) Asia-Pacific ex Japan 11.8% Equalweight - 11.8%

3) United Kingdom 5.5% Underweight - 1.0% 4.5% 7) Japan 7.6% Underweight - 1.0% 6.6%

4) Europe ex U.K. 14.8% Underweight - 1.0% 13.8% 8) Middle East / Africa 1.0% Underweight - 1.0% -

Index weighting represents relative weightings based on the regional market capitalization balance of the MSCI All-Country World Index; may not add due to rounding. The GAAC Tactical Overlay, as well as Recommended Tactical Weights, is derived from the Ameriprise Global Asset Allocation Committee (GAAC).Views are expressed relative to the Index and are provided to represent investment conviction in each region. Tactical Allocations are designed to augment Index returns over a 6-12 month time horizon. Index weights as of 9/26/18. Numbers may not add due to rounding.

Ameriprise Global Asset Allocation Committee U.S. Equity Sector - Tactical View

S&P 500 GAAC GAAC S&P 500 GAAC GAACIndex GAAC Tactical Recommended Index GAAC Tactical Recommended

Sector Weight Tactical View Overlay Weight Sector Weight Tactical View Overlay Weight

1) Communication Services 10.0% Equalweight - 10.0% 6) Health Care 15.0% Equalweight - 15.0%

2) Consumer Discretionary 10.3% Overweight +2.0% 12.3% 7) Industrials 9.7% Overweight +2.0% 11.7%

3) Consumer Staples 6.7% Underweight - 3.2% 3.5% 8) Information Technology 20.9% Equalweight - 20.9%

4) Energy 6.0% Overweight +2.0% 8.0% 9) Materials 2.5% Equalweight - 2.5%

5) Financials 13.5% Equalweight - 13.5% 10) Real Estate 2.6% Equalweight - 2.6%

11) Utilities 2.8% Underweight - 2.8% 0.0%

Index weighting represents relative weightings based on the regional market capitalization balance of the MSCI All-Country World Index; may not add due to rounding. The GAAC Tactical Overlay, as well as Recommended Tactical Weights, is derived from the Ameriprise Global Asset Allocation Committee (GAAC).Views are expressed relative to the Index and are provided to represent investment conviction in each region. Tactical Allocations are designed to augment Index returns over a 6-12 month time horizon. Index weights as of 9/26/18. Numbers may not add due to rounding.



• On Wednesday, Producer Prices for the month of September are out with forecasters expecting a 0.2% increase on both the headline and core 9exclduing food and energy) levels. Energy prices have been elevated recently but the stronger U.S. dollar should offset such gains. Core rates, however, will be very closely scrutinized for signs of labor cost influences.

• The Labor Department’s Consumer Price Index (CPI) follows on Thursday. Like the PPI report, core and headline inflation rates are each expected to see modest 0.2% increases. On a year-over-year basis, headline inflation is expected to post a rate of +2.5%, primarily in reflection of the rise in energy prices this year. Core CPI, meanwhile is expected to show a 2.2% year-over-year increase which would be consistent with the August reading but down from the +2.3% pace seen in July.

Where Markets Stand Heading into The Week:

S&P 500 Trailing and Forward P/E valuations: Source: FactSet Please note: Although we try to maintain consistency as much as possible, Price to Earnings (P/E) ratios may differ modestly from once source to another. Most notably, P/E numbers can often show their most notable differences during an earnings release season as some sources may still use the last full ‘actual’ earnings number (for instance, currently Q1 trailing 12-month earnings per share) while others use earnings per share that are updated for Q2 using a combination of actual and estimated earnings per share. The calculation of earnings (operating earnings versus ‘as reported’ or GAAP) also often differs modestly from one data source to another due to the proprietary use of calculation methodologies. The “average” shown in the charts below represent averages for the period shown.

October 8 9 10 11 12Industrial Production - Germany NFIB Small Bus. Index Producer Price Index Initial Jobless C laims Import Price Index

Home Building - Canada Wholesale Inventories Consumer Price Index U of M Consumer Conf.

Machinery Orders - Japan Industrial Production - France Inflation - France Industrial Production - Euro Zone

Trade - China Industrial Production - Italy Retail Sales - Brazil Inflation - Germany

Inflation - Mexico Industrial Production - India



Consensus Earnings Estimates: Source: FactSet

ECONOMIC NEWS OUT TODAY: Economic Releases for Monday, October 8, 2018. All times Eastern. Consensus estimates via Bloomberg. None Scheduled FIXED INCOME NEWS & VIEWS: Brian M. Erickson, CFA, Fixed Income Research & Strategy

Ten-year Treasury Yields Rise to a Seven Year High Friday • Ten-year Treasury yields broke through technical resistance last week, prompting jump in yields to 3.23% Friday.

While Treasury yields had been consolidating just above 3%, the latest leg higher for 10-year yields brings the year to date move to 83 basis points, well on the way to a full percentage point increase. A more hawkish Fed and potential for wages pressures from strong labor markets held yields near the tops of their recent trading ranges until the addition of 200k to ADP Payrolls in September prompted the breach and follow-on momentum selling sent prices lower and yields higher.

• The Treasury curve ended higher and steeper on the week, leading the 10s/2s spread widened to +34 basis points, out from +18 basis points on August 24. Momentum investors stepped in as yields broke through the key 3.12% yield level. We characterize inflation as firming; suggesting stable to modestly higher rather than a uncontained break higher. In the past, when yields moved higher we saw larger catalysts like the taper tantrum or a potential abrupt end to asset purchases. In the current case, we believe that after the technical move dissipates market expectations fall back on the need for data to back fill the rise.

• Taking inventory of other fixed income indicators that may flash warning signs. Bloomberg Barclays Investment Grade Corporate Index spreads held six month tights, refusing to gap wider. Spreads on the Bloomberg Barclays U.S. High Yield Index marked the lowest spread premium since the 2008 financial crisis at +303 basis points on October 3 as signs of rising corporate defaults remain well ahead. Although rising bond yields equate to tighter lending markets for corporations, credit remains widely available.

• Looking ahead, we believe yields may move higher as strong economic growth prompts job growth, presses unemployment even lower, and stokes wages pressures. In addition, we believe trade tariffs add an inflationary element to input costs and may lead to a rise in consumer prices as companies look to maintain margins by passing on higher prices. This likely supports continued Fed rate hikes in 2019, leading Treasury yields higher across the curve. Finally, prospects for a supply pinch in global crude markets could add to headline Consumer Price Index, prompting intermediate and long-term Treasury investors to require greater yield compensation.

• We believe key levels to watch for 10-year Treasury yields are 3.18%, and 3.25% before 3.50% comes into focus. While we see inflation supportive of higher Treasury yields, we recognize global central bank policy from the European Central Bank and Bank of Japan remains accommodative potentially limiting the degree of divergence between Treasury yields and yields in other developed markets. We also believe the slow-motion evolution of the cycle is critical to keep in mind; dynamics have been slow to evolve, especially on the inflation front.

• Both our strategic and tactical positioning guidance reflect Underweights on fixed income and the most interest rate sensitive segment, U.S. government bond, in particular. Our fixed income positioning also encompasses a shorter

S&P 500 Earnings Estimates 2013 2014 2015 201910/8/2018 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Est. Est. Est.

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Quarterly $$ amount $27.10 $29.63 $31.42 $31.32 $30.87 $32.80 $33.54 $36.29 $38.71 $41.03 $40.50 $42.52 change over last week -$0.04 -$0.03 yr/yr -5.2% -1.3% 3.8% 7.1% 13.9% 10.7% 6.7% 15.9% 25.4% 25.1% 20.8% 17.2% qtr/qtr -8% 9% 6% 0% -1% 6% 2% 8% 7% 6% -1% 5%

Trailing 4 quarters $$ $111.41 $119.02 $118.67 $116.57 $116.24 $117.49 $119.64 $123.25 $126.42 $128.53 $133.50 $141.34 $149.57 $156.53 $162.76 $178.18 yr/yr 5.8% 6.8% -0.3% 0.5% 11.6% 21.9% 9.5%Implied P/E based on a S&P 500 level of: 2886 20.4 19.3 18.4 17.7 16.2

20182016 2017



duration target of 5 years relative to the Bloomberg Barclays U.S. Aggregate Index. We believe investors tracking our guidance are positioned appropriately for rising yields. See our report Committee Perspectives: Fixed Income Investing dated September 21, 2018 for more on our guidance.

• The week ahead: September Consumer Price Index and Producer Price Index figures at scheduled for release adding to context on the inflation front. We are watching how input costs may be impacting margins for corporations and how the recent rise in crude prices has led headline inflation levels higher in September.

Source: Bloomberg

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10-Year and 30-Year Treasury YieldsYield (%)

10-year 30-year



Ameriprise Investment Research Group Ameriprise Financial 1441 West Long Lake Road, Suite 250, Troy, MI 48098 [email protected] For additional information or to locate your nearest branch office, visit ameriprise.com RESEARCH & DUE DILIGENCE LEADER

Lyle B. Schonberger - Vice President Business Unit Compliance Liaison (BUCL)

Kirk D. Dedenbach – Senior Manager

Jeff Carlson, CLU, ChFC – Manager Investment Research Coordinator Kimberly K. Shores Sr. Administrative Assistant Open EQUITY RESEARCH Equity Research Director Justin H. Burgin – Vice President

Consumer Goods and Services Patrick S. Diedrickson, CFA – Sr. Research Analyst

Energy/Utilities Justin H. Burgin – Sr. Research Analyst

Financial Services/REITs Lori A. Wilking-Przekop – Senior Director

Health Care Justin H. Burgin – Sr. Research Analyst

Industrials/Materials Frederick M. Schultz – Sr. Research Analyst

Technology/Telecommunication Curtis R. Trimble – Sr. Research Analyst Quantitative Strategies/International Andrew R. Heaney, CFA

STRATEGISTS CHIEF MARKET STRATEGIST David M. Joy – Vice President GLOBAL MARKET STRATEGIST Anthony M. Saglimbene – Vice President

Thomas Crandall, CFA, CAIA – Sr. Quantitative Analyst, Asset Allocation

Open – Research Analyst - Quantitative, Asset Allocation

Gaurav Sawhney – Research Analyst

Amit Tiwari – Sr. Research Associate SENIOR ECONOMIST Russell T. Price, CFA – Vice President MANAGER RESEARCH

Michael V. Jastrow, CFA – Vice President

Jeffrey R. Lindell, CFA – Sr. Research Analyst – ETFs & CEFs

Mark Phelps, CFA – Sr. Research Analyst – Multi-Asset Solutions Equities Christine A. Pederson, CAIA, CIMA – Director – Growth Equity

Open, CFA – Sr. Research Analyst – International/Global Equity, Infrastructure & REIT

Benjamin L. Becker, CFA – Sr. Research Analyst – Core Equity

Cynthia Tupy, CFA – Research Analyst – Value and Equity Income Equity Fixed Income & Alternatives Jay C. Untiedt, CFA, CAIA – Director – Alternatives

Steven T. Pope, CFA, CFP® – Sr. Research Analyst – Non-Core Fixed Income

Douglas D. Noah – Research Analyst – Core Taxable & Tax-Exempt Fixed Income

Blake Hockert – Research Associate – Reporting & Analytics

FIXED INCOME RESEARCH & STRATEGY

Fixed Income Research Brian M. Erickson, CFA – Vice President High Yield and Investment Grade Credit Jon Kyle Cartwright – Senior Director

Stephen Tufo – Sr. Credit Analyst INVESTMENT DUE DILIGENCE

Justin E. Bell, CFA – Vice President

Kurt J. Merkle, CFA, CAIA – Sr. Director

Kay S. Nachampassak – Director

Peter W. LaFontaine – Sr. Due Diligence Manager

James P. Johnson, CFA, CFP® – Due Diligence Manager

David Hauge, CFA – Due Diligence Manager

Bishnu Dhar – Sr. Research Analyst



The content in this report is authored by American Enterprise Investment Services Inc. (“AEIS”) and distributed by Ameriprise Financial Services, Inc. (“AFSI”) to financial advisors and clients of AFSI. AEIS and AFSI are affiliates and subsidiaries of Ameriprise Financial, Inc. Both AEIS and AFSI are member firms registered with FINRA and are subject to the objectivity safeguards and disclosure requirements relating to research analysts and the publication and distribution of research reports. The “Important Disclosures” below relate to the AEIS research analyst(s) that prepared this publication. The “Disclosures of Possible Conflicts of Interest” section, where applicable, relates to the conflicts of interest of each of AEIS and AFSI, their affiliates and their research analysts, as applicable, with respect to the subject companies mentioned in the report. Each of AEIS and AFSI have implemented policies and procedures reasonably designed to ensure that its employees involved in the preparation, content and distribution of research reports, including dually registered employees, do not influence the objectivity or timing of the publication of research report content. All research policies, coverage decisions, compensation, hiring and other personnel decisions with respect to research analysts are made by AEIS, which is operationally independent of AFSI. Investment Professionals, Inc. (“IPI”), an affiliate of AEIS and AFSI and a subsidiary of Ameriprise Financial, Inc., may also distribute this report to its financial advisors and clients of IPI. For important disclosure information relating to IPI, including potential conflicts of interest, please visit https://www.invpro.com/wp-content/uploads/2012/04/IPI_COMPANY_DISCLOSURES-1.pdf IMPORTANT DISCLOSURES As of September 30, 2018 The views expressed regarding the company(ies) and sector(s) featured in this publication reflect the personal views of the research analyst(s) authoring the publication. Further, no part of research analyst compensation is directly or indirectly related to the specific recommendations or views contained in this publication. A part of a research analyst’s compensation may be based upon overall firm revenue and profitability, of which investment banking, sales and trading, and principal trading are components. No part of a research analyst’s compensation is based on a specific investment banking transaction, nor is it based on sales, trading, or principal trading. A research analyst may have visited the material operations of one or more of the subject companies mentioned in this research report. No payment was received for the related travel costs. Additional information and current research disclosures on individual companies mentioned in this research report are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor. You may also submit a written request to Ameriprise Financial, Inc., 1441 West Long Lake Road, Troy MI, 48098. Independent third-party research on individual companies is available to clients at ameriprise.com/research-market-insights. SEC filings may be viewed at sec.gov. Tactical asset class recommendations mentioned in this report reflect The Ameriprise Global Asset Allocation Committee’s general view of the financial markets, as of the date of the report, based on then current conditions. Our tactical recommendations may differ materially from what is presented in a customized long-term financial plan or portfolio strategy. You should view our recommendations in conjunction with a broader long-term portfolio strategy. Not all products, services, or asset classes mentioned in this report may be available for sale at Ameriprise Financial Services, Inc. Please consult with your financial advisor. Diversification and Asset Allocation do not assure a profit or protect against loss.

RISK FACTORS Dividend and interest payments are not guaranteed. The amount of dividend payment, if any, can vary over time and issuers may reduce or eliminate dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer. Should a company be unable to pay interest on a timely basis a default may occur and interruption or reduction of interest and principal occur. Investments in a narrowly focused sector may exhibit higher volatility than investments with broader objectives and is subject to market risk and economic risk. Income Risk: We note that dividends are declared solely at the discretion of the companies’ boards of directors. Dividend cuts or eliminations will likely negatively impact underlying company valuations. Published dividend yields are calculated before fees and taxes. Dividends paid by foreign companies to ADR holders may be subject to a withholding tax which could adversely affect the realized dividend yield. In certain circumstances, investors in ADR shares have the option to receive dividends in the form of cash payments, rights shares or ADR shares. Each form of dividend payment will have different tax consequences and therefore generate a different yield. In some instances, ADR holders are eligible to reclaim a portion of the withholding tax. International investing involves increased risk and volatility due to political and economic instability, currency fluctuations, and differences in financial reporting and accounting standards and oversight. Risks are particularly significant in emerging markets. Market Risk: Equity markets in general could sustain significant volatility due to several factors. As we have seen recently, both economic and geopolitical issues could have a material impact on this model portfolio and the equity market as a whole. Quantitative Strategy Risk: Stock selection and portfolio maintenance strategies based on quantitative analytics carry a unique set of risks. Quantitative strategies rely on comprehensive, accurate and thorough historical data. The Ameriprise Investment Research Group utilizes current and historical data provided by third-party data vendors. Material errors in database construction and maintenance could have

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an adverse effect on quantitative research and the resulting stock selection strategies. PRODUCT RISK DISCLOSURES Exchange Traded Funds (ETF) trade like stocks, are subject to investment risk and will fluctuate in market value. For additional information on individual ETFs, see available third-party research which provides additional investment highlights. SEC filings may be viewed at sec.gov All fixed income securities are subject to a series of risks which may include, but are not limited to: interest rate risk, call risk, refunding risk, default risk, inflations risk, liquidity risk and event risk. Please review these risks with your financial advisor to better understand how these risks may affect your investment choices. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. This means you may lose money if you sell a bond prior to maturity as a result of interest rate or other market movement. Any information relating to the income or capital gains tax treatment of financial instruments or strategies discussed herein is not intended to provide specific tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. A real estate investment trust or REIT is a company that owns and operates income-producing real estate. In addition, some REITs participate in the financing of real estate. To qualify as a REIT, a company must: I) invest at least 75% of its total assets in real estate assets, II) generate at least 75% of its gross income from real property or interest, and III) pay at least 90% of its taxable income to shareholders in the form of distributions. A company that qualifies as a REIT is permitted to deduct the distributions paid to shareholders from its corporate taxes. Consequently, many REITs target to payout at least 100% of taxable income, resulting in virtually no corporate taxes. An investment in a REIT is subject to many of the same risks as a direct investment in real estate including, but not limited to: Illiquidity and valuation complexities, redemption restrictions, distribution and diversification limits, tax consequences, fees, defaults by borrowers or tenants, market saturation, balloon payments, refinancing, bankruptcy, decreases in market rates for rents and other economic, political, or regulatory occurrences affecting the real estate industry. Ratings are provided by Moody’s Investors Services and Standard & Poor’s. Non-Investment grade securities, commonly known as "high-yield" or "junk" bonds, are historically subject to greater risk of default, including the loss of principal and interest, than higher-rated bonds, which may result in greater price volatility than experienced with a higher-rated issue. Securities offered through AFSI may not be suitable for all investors.

Consult with your financial advisor for more information regarding the suitability of a particular investment. For further information on fixed income securities please refer to FINRA’s Smart Bond Investing at FINRA.org, MSRB’s Electronic Municipal Market Access at emma.msrb.org, or Investing in Bonds at investinginbonds.com. DEFINITIONS OF TERMS Agency – Agency bonds are issued by Government Sponsored Enterprises (GSE), but are NOT direct obligations of the U.S. government. Common GSE’s are the Federal Home Loan Mortgage Corp. (Freddie Mac) Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Bank (FHLB). Beta: A measure of the risk arising from exposure to general market movements as opposed to company-specific factors. Betas in this report, unless otherwise noted, use the S&P 500 as the market benchmark and result from calculations over historic periods. A beta below 1.0, for example, can suggest the equity has tended to move with lower volatility than the broader market or, due to company-specific factors, has had higher volatility but generally low correlations with the overall market. Corporate Bonds – Are debt instruments issued by a private corporation. Non-Investment grade securities, commonly known as “high-yield” or “junk” bonds, are historically subject to greater risk of default, including the loss of principal and interest, than higher-rated bonds, which may result in greater price volatility than experienced with a higher-rated issue. Mortgage Backed Securities – Bonds are subject to prepayment risk. Yield and average lives shown consider prepayment assumptions that may not be met. Changes in payments may significantly affect yield and average life. Please contact your financial advisor for information on CMOs and how they react to different market conditions. Municipal Bonds – Interest income may be subject to state and/or local income taxes and/or the alternative minimum tax (AMT). Municipal securities subject to AMT assume a “nontaxable” status for yield calculations. Certain municipal bond income may be subject to federal income tax and are identified as “taxable”. Gains on sales/redemptions of municipal bonds may be taxed as capital gains. If the bonds are insured, the insurance pertains to the timely payment of principal (at maturity) and interest by the insurer of the underlying securities and not to the price of the bond, which will fluctuate prior to maturity. The guarantees are backed by the claims-paying ability of the listed insurance company. Treasury Securities – There is no guarantee as to the market value of these securities if they are sold prior to maturity or redemption. Price/Book: A financial ratio used to compare a company’s market share price, as of a certain date, to its book value per share. Book value relates to the accounting value of assets and liabilities in a company’s balance sheet. It is generally not a direct reflection of future earnings prospects or hard to value intangibles, such as brand, that could help generate those earnings.

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Price/Earnings: An equity valuation multiple calculated by dividing the market share price, as of a certain date, by earnings per share. Trailing P/E uses the share price divided by the past four-quarters’ earnings per share. Forward P/E uses the share price as of a certain date divided by the consensus estimate of the future four-quarters’ EPS. Price/Sales: An equity valuation multiple calculated by dividing the market share price, as of a certain date, by the company’s sales per share over the most recent year. INDEX DEFINITIONS An index is a statistical composite that is not managed. It is not possible to invest directly in an index. Definitions of individual indices mentioned in this report are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor. DISCLAIMER SECTION Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, historical sector performance relationships as they relate to the business and economic cycle, consumer preferences, foreign currency exchange rates, litigation risk, competitive positioning, the ability to successfully integrate acquisitions, the ability to develop and commercialize new products and services, legislative risks, the pricing environment for products and services, and compliance with various local, state, and federal health care laws. See latest third-party research reports and updates for risks pertaining to a particular security. This summary is based upon financial information and statistical data obtained from sources deemed reliable, but in no way is warranted by Ameriprise Financial, Inc. as to accuracy or completeness. This is not a solicitation by Ameriprise Financial Services, Inc. of any order to buy or sell securities. This summary is based exclusively on an analysis of general current market conditions, rather than the suitability of a specific proposed securities transaction. We will not advise you as to any change in figures or our views. Past performance is not a guarantee of future results. Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. AFSI and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Ameriprise Financial Services, Inc. Member FINRA and SIPC.

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before the bell · 2018-10-08 · before the bell morning market brief october 8, 2018 ... by fed...

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