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The Global Markets Weekly – 1/4/19
What Powell Taketh Away, He Giveth Back
Pessimism on the Fed’s rate hike path in 2019 appeared overdone well before recent days saw a late-2019 cut nearly become the baseline path in market pricing. A near-term cut remains a remote possibility, in DE’s view, strengthened by the clear upward surprise in Friday’s jobs data. A stocks-friendly report on its own – solid growth, stronger wage growth, greater labor force participation hinting at more slack, and less inflation pressure – equity markets got a serious shot in the arm mid-morning, as Fed Chair Powell joined former colleagues Bernanke and Yellen in a panel discussion in Atlanta.
While the half-life on policy comments is inevitably likely to be short in a global environment marked by uncertainty about current economic momentum, the takeaway was greater acknowledgment of financial market pain (Powell “listening sensitively”), and the message it might be sending about near-term growth prospects. As a result, Powell more explicitly noted that the Federal Reserve will stand ready to respond appropriately on either rate hikes or the balance sheet if conditions warrant. He also sounded less worried about inflation pressures, explicitly discarding stronger wage growth (3.2% y/y, a cycle high) as a signal of firmer price pressures. Indeed, headline price inflation is likely to dip within reach of 1% y/y in coming months.
His comments come in the wake of an initial misstep in October that conventionally gets the blame as kicking off the current U.S. market correction. Since then, he has added several rounds of nuances to the Fed’s communications, not all successful, including at the latest FOMC meeting that kicked off the late-December drawdown. A key change was sign of nuance on the balance sheet. To the extent the autopilot runoff might adversely impact the Fed’s goals, or importantly, to the extent that market participants believed it might, Powell appeared more receptive to tweaks. Again, if warranted, not a guarantee. DE expects at least one hike, likely in June, with a second if the economy fares in line with our projections.
Momentum as strong as we’re seeing in hiring and wages (recap within) is unlikely to turn on a dime. Still, market attention on consumer sentiment, spending, corporate investment and hiring plans in coming months will be intense. DE remains upbeat on the U.S. economy’s prospects in 2019, even if we see some slowing into a 2.5%-3% range on average. Markets are right to fear a much slower pace of corporate profit growth in 2019. Near-25% gains in 2018 are transitioning into a 5-8% y/y range on average, with a negative quarter not out of the question given base effects. We remain overweight equities, albeit at a reduced share despite the recent re-rating in stocks, and are set to monitor a range of key event risks and data ahead.
Coming Week’s Key Indicators and Events
|Release||DE / Consensus||Comment|
|U.S.||Dec ISM NM (We)
FOMC Minutes (We)
Dec CPI (Fr)
|-2.7 to 59.0 / -2.7
Powell, Bullard, Evans, Clarida (Th)
-0.3% /-0.1% m/m
0.1% / 0.2% m/m
|Strong December jobs take some import off service sector survey, but Manufacturing moderating.
FOMC can afford to be patient for a quarter or two.
Headline CPI and PCE slipping well below 1.5% y/y near-term, core in focus.
|Japan||Dec Svcs. PMI
|+0.3 to 52.6 / +0.3||Manufacturing PMI bouncing in moderate expansion territory, growth rebounding after natural disasters.|
|China||Dec CPI (Th)
|2.1% / 2.1% y/y||Looming trade talks the market-relevant event.|