Are better days ahead for the U.S. manufacturing sector?

On the latest edition of Market Week in Review, Senior Portfolio Manager Megan Roach and Research Analyst Puneet Thiara discussed the initial trade deal between China and the U.S., recently released macroeconomic data and expectations for fourth-quarter earnings season.

Highlights of the China-U.S. trade deal

The official signing of the phase one trade deal between the U.S. and China took place 15 January, with China committing to further protections of U.S. intellectual property, as well as increased access to its financial services sector. China also pledged to purchase an additional $200 billion in U.S. goods, with an emphasis on manufacturing and agricultural products, Roach said.

"In turn, the U.S. removed China’s designation as a currency manipulator, which was a positive for markets," she stated. What wasn’t removed, Roach noted, were most of the existing tariffs on Chinese imports. "U.S. tariffs on approximately $360 billion worth of Chinese goods will stay in place - with the expectation that these tariffs will be used as a point of leverage in the upcoming phase two negotiations," she explained. Roach added that while these talks are likely to kick off in short order, they’re also projected to last for a lengthy period of time - perhaps not concluding until after the November presidential election.

All in all, the signing of the initial deal marks a favourable milestone between the world’s two largest economies, Roach said, although the agreement was met with slight disappointment by some. "The lack of detail in the deal, particularly on the agricultural side as it relates to soybeans, fell shy of what some were expecting," she noted. Roach explained that some individuals were hoping that China would commit to a specific amount of U.S. soybean purchases, rather than basing these purchases on the level of demand.

Regional Fed surveys provide dose of optimism for U.S. manufacturing

A host of macroeconomic data was also released the week of 13 January, Roach said, including inflation numbers from the U.S. and some European economies. The data showed that U.S. inflation remains quite low, even in spite of a very tight labour market, she noted. "The Labour Department announced 16 January that the number of Americans filing for unemployment benefits declined for the fifth straight week, which really reaffirms the market’s tightness," Roach said.

Turning to U.S. manufacturing, she noted that while the sector has been in a state of contraction for the past five months, newly released regional Federal Reserve manufacturing surveys from Philadelphia and New York showed an increase in activity in early January. "This data may make markets a little more optimistic that the worst is in the past for the U.S. manufacturing sector," she stated.

On the consumer side, data from the week of 13 January reinforced the idea that the U.S. consumer is a source of strength, Roach said, with home-building and retail sales reports both trending moderately positive.

Q4 earnings season projections

Fourth-quarter U.S. earnings season began the week of 13 January, Roach said, with large financial services companies among the first to report. "While the season appears to be getting off on the right foot, the headline expectation across the entire S&P 500 is for negative quarterly earnings growth," she stated. Historically, however, between two-thirds to three-quarters of S&P 500 companies beat growth expectations, Roach noted. "With this in mind, I don’t think it would be shocking in a few weeks’ time to see overall earnings growth move into slightly positive territory," she said.

Utilities, financial services and healthcare are forecast to be among the highest-performing sectors, while the energy and consumer discretionary sectors are predicted to be among the fourth quarter’s weak spots, Roach concluded.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.