Just OK is Not OK
Today’s highly-anticipated nonfarm payroll report featured a blockbuster number of 266k new jobs, handily topping an estimate of 183k and giving the many traders who were playing for a mildly disappointing reading a case of whiplash. But the reflexive selloff in Treasury markets settled down quickly and futures markets are still projecting that the Fed will be back cutting interest rates in the second half of next year. That bond market price action is consistent with a pretty sober outlook for growth in 2020, which matches the broad consensus among economists that US GDP is going to soften modestly to 1.8% from this year’s 2.3%.
That growth rate is okay but, as the TV commercial reminds us these days, sometimes just okay is not okay. And what is not okay is that US growth appears to be settling to a pretty languid pace despite a double-barrel blast of fiscal and monetary stimulus. All else being equal, the Trump tax cuts and a rising federal deficit (nearly 5% of GDP now), alongside three Fed rate cuts and renewed balance sheet expansion (quantitative easing-lite) should be underwriting some more impressive economic momentum.
Economists point to the headwinds from the multi-front US trade offensive that have ebbed and flowed over the past few years as dampening economic activity, so the optimistic case for a 2020 rebound is centered upon a Phase One US-China trade deal. And monetary policy acts with a lag, so the Fed’s pivot to easing and eventual trio of rate cuts earlier this year should begin to show up in growth data in the coming months.
But the timeline for finalizing what will probably end up being a relatively limited trade accord between Washington and Beijing keeps getting pushed out. And there are questions as to just how much extra oomph the Fed’s monetary easing will give the economy.
In an election year, President Trump will not sit idly by and watch US GDP cool off, and in any case he is all but certain to continue pressuring the Fed to do more. Investors are focusing on the Fed’s current policy pause and the ongoing asset purchase program, which is scheduled to continue at its current pace of $60 billion per month “at least into the second quarter of next year.” It is difficult to imagine the Fed risking the wrath of both the President and financial markets by sunsetting this liquidity program with only a few months until the pivotal 2020 election, and least one additional Fed rate cut next year also looks like a good bet.
Looking ahead to next week, the Fed and European Central Bank have meetings and key global economic data is on the calendar, including US retail sales and global manufacturing gauges.
- Federal Reserve Decision
- US Economic Data
- Global Factory Data
- European Central Bank
- EU Economic Data
Federal Reserve Decision: Hold please
The FOMC Interest Rate Meeting takes place on Wednesday, shortly after that morning’s release of consumer price index (CPI) inflation data (see below), with the lack of price pressures sure to be at the top of Chair Powell’s mind. At their October meeting, the FOMC voted to cut the target range for the federal funds rate to 1.5-1.75%, which was the third rate cut in 2019. Muted inflationary pressures and concerns about the economic outlook were cited as reasons for the reduction. However, the policy statement signaled a desire to pause the easing cycle as they removed the previous reference that they “will act as appropriate” to sustain the economic expansion. The subsequent meeting minutes showed the Fed considers the current fed funds rate as appropriate, if incoming information about the economy does not result in a reassessment of the outlook. Markets have taken this to suggest no further rate cuts should be expected in the near future and are currently pricing in 93% odds that the Fed remains on hold next week.
US Economic Data: Retail therapy
Tuesday will bring the NFIB Small Business Optimism Index. In October, it rose 0.6 points from September to 102.4. Eight out of ten index components improved, as talk of a recession faded, supported by increased plans for job creation, inventory investment, and capital spending. Small businesses continued to hire and create new jobs and capital spending rose along with inventory investment. Labor costs continued to rise as employers are having difficulty finding qualified candidates. The Uncertainty Index dropped 4 points but is still high on a historical basis heading into an election year.
Wednesday begins with the November Consumer Price Index (CPI) in the US. In October, the CPI increased to 1.8% year-on-year (y/y) from 1.7% in September and higher than market expectations of 1.7%. Core CPI, which excludes the more volatile food and energy components, rose 2.3% y/y. On a monthly basis, CPI increased 0.4%, which was a rebound from September’s flat reading and energy prices rose 2.7% after recent monthly declines. Meanwhile, Core CPI rose 0.2% month-on-month (m/m).
On Friday, the focus will be on November Retail Sales. In October, retail sales rose 0.3% m/m, reversing a 0.3% drop in September but only 5 of the 13 major retail categories showed monthly increases. Retail Sales excluding autos rose 0.2% m/m, reversing a 0.1% drop in September. Year-on-year, sales grew 3.1%, compared to 4.1% in September.
Global Manufacturing Data: Factory floored
With hopes of a global manufacturing rebound in 2020, on Thursday evening in Japan the focus will be on the Bank of Japan’s 4Q Tankan Index for Big Manufacturers’ Sentiment. In the third quarter (3Q), the index fell to a six-year low of 5 from 7 in 2Q. Sentiment deteriorated among enterprises producing: petroleum & coal products, non-ferrous metals, general-purpose machinery, production machinery, motor vehicles, shipbuilding & heavy machinery, chemicals, ceramics, stone & clay, iron & steel, food & beverages, and textiles. In contrast, sentiment rose among companies producing lumber & wood products, business-oriented machinery, and electrical machinery. Big firms planned to raise their capital spending by 6.6%. Among non-manufacturing large firms, sentiment weakened to 21.
This will be followed on Friday in Europe with the December Flash IHS Markit Eurozone Manufacturing PMI. The November PMI was 46.9 versus 45.9 in October. The reading showed the 10th straight month of contraction in Eurozone manufacturing. Output, new orders, export orders and employment continued to shrink. On the other hand, business confidence was the highest in five months as all nations covered by the survey indicated some optimism that output would be higher than present levels in 12 months’ time. Of the eight countries covered by the survey, manufacturing only grew in Greece and France. Germany remained at the bottom of the table followed by Austria and Spain, while Italy registered its lowest PMI print in eight months.
European Central Bank Decision: Meet the new boss
The European Central Bank (ECB) holds an Interest Rate Meeting, which will be President Christine Lagarde’s first as head of the central bank. On October 24th the ECB kept rates on hold during Mario Draghi’s final meeting as president, with the main refinancing rate remaining at 0 and the deposit rate at -0.5%. The bank said it expects key interest rates to remain at their present or lower levels until inflation moves towards close to, but still below, their 2% target. Minutes of the meeting showed policymakers agreed that September’s stimulus measures should be allowed more time to fully impact the economy and inflation, despite concerns about the possible side effects. Officials also made a “strong call” for unity, as several members opposed the stimulus package in September, and also reiterated that fiscal policy had to play a more prominent role in supporting growth. With all of this in mind, the market is pricing in little chance of a cut next week.
EU Economic Data: What’s new with ZEW?
Tuesday the market will focus on the ZEW Indicator of Economic Sentiment for Germany. November showed much needed optimism as the ZEW jumped 20.7 points from October to -2.1. This was the highest since May and easily beat market expectations of -13. “There is growing hope that the international economic policy environment will improve in the near future, which explains the sharp rise in the ZEW Indicator of Economic Sentiment in November… An agreement in the trade conflict between the USA and China is appearing more likely too,” commented ZEW President Professor Achim Wambach. The assessment of the economic situation in the country improved by 0.6 points to -24.7, which was an encouraging sign.