Month-In-Review: January 2019
The Fed opted to hold rates unchanged at the latest January FOMC meeting. While confident in the “solid” pace of activity in the U.S., the Committee noted concerns stemming from international “cross currents” and “unresolved government policy issues”– including Brexit, trade relations and the U.S. government shutdown – as well as “muted inflation pressures.” Separately, the Committee noted it would likely hold an “ample” supply of reserves when the balance sheet is right-sized. While the U.S. government shutdown eventually ended on the 25th, the closure caused an extreme backlog of economic releases, making it more difficult to gauge the full impact as well as the directional momentum of the domestic economy with a second-round potential shutdown after just 21 days.
U.S.-China trade talks, meanwhile, continued, boosting optimism that the two sides could reach an agreement and avoid an all-out confrontation which supported equities. However, with the March 2nd deadline rapidly approaching there is still a ways to go before negotiations result in a longer-term deal between the world’s two largest economies.
Market Activity and Commodities
· Equities – Equities recovered at the start of the year after a dismal December, marking the best January in roughly 30 years and offering investors optimism after 2018 posted the worst year for the markets in over a decade. Beginning at 2,506.85, the S&P 500 rose 7.9% in January and closed at 2,704.10. The Dow rose 7.2%, closing the month at 24,999.67. Since the start of 2017, U.S. equities were up an average 26%.
· Treasuries – Treasury yields were lower throughout the month of January. The 10-yr treasury yield fell 6bps, declining from 2.69% to 2.63%. The 2-yr treasury yield declined 3bps by the end of January, closing at 2.46%. Since the start of 2018, however, the 10-yr increased 22bps and the 2-yr rose 57bps.
· Oil
o (Jan 14) – According to Saudi Energy Minister Khalid al-Falih, OPEC’s largest oil producer is willing to work to rebalance the global oil market. Speaking at an oil conference in Abu Dhabi, al-Falih said he is willing to work with all parties and that could include President Trump. He furthermore suggested that there was no need for an extraordinary OPEC meeting before April, noting that the oil market is "on the right track" and will quickly return to balance. Crude traded down 0.10% at $51.54 a barrel.
o (Jan 17) – OPEC got a jump on its output cut deal in December, reducing oil supplies from the group by 751K barrels per day to nearly 31.6M bpd, according to Bloomberg. Crude traded down 1.59 at $51.48 a barrel.
o (Jan 28) – The threat of further U.S. sanctions against Venezuela pushed oil prices slightly higher. With Iran already hit by U.S. sanctions, a drop in Venezuelan exports could offset some of the record U.S. production. Oil prices rose 0.09% to $53.18 a barrel.
National Growth and Outlook
· NFIB Small Business Optimism (Jan 8) – The NFIB Small Business Optimism Index declined from 104.8 to a reading of 104.4 in December, less than the expected decline to a reading of 103.0, according to Bloomberg, albeit the lowest reading since October 2017.
· Leading Index (Jan 24) – The Leading Index declined 0.1% in December, as expected, according to Bloomberg, and following a 0.2% rise the month prior.
· Chicago Fed National Activity Index (Jan 28) – The Chicago Fed National Activity Index rose from 0.21 to a reading of 0.27 in December, a four-month high. The Chicago Fed National Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In December, 46 of the 85 monthly individual indicators made positive contributions, while 39 made negative contributions.
· GDP (Jan 30) – Q4 data release postponed due to the government shutdown.
Employment
· Jobless Claims
o (Jan 3) – Initial jobless claims rose 10k from 221k to 231k in the week ending December 29. The four-week average, however, remained at 221k for the second consecutive week.
o (Jan 10) – Initial jobless claims fell 17k from 233k to 216k in the week ending January 5. The four-week average, however, rose from 219k to 222k.
o (Jan 17) – Initial jobless claims declined 3k from 216k to 213k in the week ending January 12. The four-week average fell from 222k to 221k.
o (Jan 24) – Initial jobless claims fell 13k from 212k to 199k in the week ending January 19, the lowest level since 1969. The four-week average declined from 221k to 215k.
o (Jan 31) – Initial jobless claims rose 53k from 200k to 253k in the week ending January 26. The four-week average rose from 215k to 220k.
· Nonfarm Payrolls (Jan 4) – Nonfarm payrolls rose 312k in December, significantly more than the 184k gain expected, according to Bloomberg, and marking a ten-month high. November payrolls were revised up from 155k to 176k, and October payrolls were revised higher from 237k to 274k. Thus, the overall change in nonfarm payrolls (December data + net revisions) was 370k. In the details, private payrolls increased 301k in December, following a 176k gain in November. Goods-producing payrolls gained 74k at the end of 2018, a ten-month high, due to a 38k increase in construction payrolls. Manufacturing payrolls rose 32k in December, a one-year high. Service producing payrolls increased by 227k in December, the largest gain since October 2017, and following a 146k rise the month prior. Trade and transport payrolls increased 34k, thanks to a 24k rise in retail trade payrolls in December. Education and health payrolls popped 82k in the final month of 2018, the most since February 2012, and business services payrolls rose 43k, thanks to a 10k rise in temporary help payrolls. Additionally, leisure and hospitality payrolls rose 15k and financial payrolls gained 6k in December. On the weaker side, information payrolls increased 55k in December, a two-month high. Government payrolls rose 11k in December, following a 3k rise in November. The rise was at the state and local level with federal employment declining 3k at the end of last year.
· Participation Rate (Jan 4) – The civilian labor force increased by 419k in December, following a 133k rise in November. The participation rate, therefore, rose from 62.9% to 63.1% at the end of the year.
· Unemployment Rate (Jan 4) – Household employment rose by 142k in December, less than the 419k rise in the labor force. Thus, the unemployment rate ticked up two-tenths of a percentage point to 3.9%, a five-month high.
· Average Hourly Earnings (Jan 4) – Average hourly earnings rose 0.4% in December, a tenth of a percentage point more than expected, according to Bloomberg, and following a 0.2% rise in November. Year-over-year, wages rose 3.2% in December, matching the pace in October.
· Average Weekly Hours (Jan 4) – The average workweek rose from 34.4 to 34.5 in December, a two-month high.
· JOLTS (Jan 8) – The number of job openings declined 243k from 7.13m to 6.89m in November, a five-month low. According to Bloomberg, the number of job openings was expected to fall to 7.05m in November.
Consumer Activity and Confidence
· Vehicle Sales (Jan 3) – Total vehicle sales rose 0.6% at the end of 2018 from 17.40m to a 17.50m unit pace, a two-month high. Year-over-year, however, vehicle sales fell 1.5% in December, following a flat reading the month prior.
· Consumer Credit (Jan 8) – Consumer credit increased by $22.15b in November, more than the $17.50b rise expected, according to Bloomberg, and following a $24.98b gain in October. Since the beginning of 2018, monthly gains in consumer credit have averaged $13.85 billion.
· University of Michigan Consumer Sentiment
o (Jan 18) – The University of Michigan Consumer Sentiment Index declined from 98.3 to a reading of 90.7 in the preliminary January reading, more than the expected decline to 96.8, according to Bloomberg, and the lowest reading since October 2016. In the details, consumers’ assessment of current conditions fell from 116.1 to a reading of 110.0, and consumer expectations declined from 87.0 to a reading of 78.3 in the preliminary January report, the lowest reading since October 2016.
· Retail Sales (Jan 16) – December data release postponed due to the government shutdown.
· Consumer Confidence (Jan 29) – The Consumer Confidence Index declined from 126.6, revised down from an originally reported reading of 128.1 to 120.2 in January, an eighteen-month low, and reflecting the negative and sizable impact of the government shutdown on the average American. In the details, present situation fell from 169.9 to 169.6 and consumer expectations fell from 97.7 to 87.3 at the start of the year, the lowest reading since October 2016.
Inflation
· CPI (Jan 11) – The CPI declined 0.1% in December, as expected, according to Bloomberg, and following a flat reading the month prior. Year-over-year, headline consumer prices rose 1.9% at the end of 2018, the slowest pace since August 2017. Energy costs fell 3.5%, the largest monthly decline since early 2016, while food prices rose 0.4% in December, following a 0.2% rise the month prior. Excluding food and energy, the core CPI rose 0.2% in December, following a similar rise the month prior. Over the past 12 months, the core rose 2.2% for the second consecutive month, also as expected, according to Bloomberg. In the details, services costs rose 0.3% at the end of the year, following a 0.2% rise the month prior. Housing prices increased 0.4% in December, thanks to a 0.2% rise in the OER. Also, medical care prices rose 0.3%, recreation prices gained 0.6%, and education and communication costs rose 0.1%, thanks to a 1.4% rise in computer costs following two consecutive months of decline. On the weaker side, apparel prices were flat, commodities prices fell 0.7%, and transportation prices declined 2.0% in December, the second consecutive month of weakness. Finally, other goods and services prices fell 0.1% at the end of the year, due to a 0.4% drop in tobacco prices.
· PPI (Jan 15) – The PPI fell 0.2% December, a tenth of a percentage point more than expected, according to Bloomberg, and following a 0.1% gain the month prior. Year-over-year, headline producer prices rose 2.5% in December for the second consecutive month, as expected, according to Bloomberg. In the details, food prices rose 2.6%, following a 1.3% gain the month prior, while energy prices dropped 5.4% in December, the largest monthly decline since September 2015. Year-over-year, energy prices fell 2.7%, down from the 2.9% rise the month prior. Excluding food and energy costs, the core PPI declined 0.1% at the end of the year and increased 2.7% over the past 12 months, less than the 2.9% rise expected, according to Bloomberg, and following a similar rise the month prior. Additionally, services costs fell 0.1% in December, due to a 0.2% decline transportation and warehousing costs and a 0.3% fall in trade costs, a three-month low.
· PCE (Jan 31) – December data release postponed due to the government shutdown.
Manufacturing and Production Activity
· ISM Manufacturing (Jan 3) – The ISM Manufacturing Index fell from 58.8 to a reading of 54.1 in December, the lowest level since November 2016. According to Bloomberg, the index was expected to decline to a reading of 57.5 at the end of 2018. In the details, employment fell from 58.4 to 56.2, new orders dropped from 62.1 to 51.1 and backlog of orders declined from 56.4 to 50.0 in December, the lowest level since January 2017. Additionally, production fell from 60.6 to 54.3 and supplier deliveries declined from 62.5 to 57.5 at the end of the year. Prices paid declined from 60.7 to 54.9 and imports fell from 53.6 to 52.7 in December, the lowest reading since May 2017.
· ISM Non-Manufacturing (Jan 7) – The ISM Non-Manufacturing Index declined from 60.7 to a reading of 57.6 in December, more than the expected decline to 58.5, according to Bloomberg, and a five-month low. In the details, new orders gained from 62.5 to 62.7 in December, a six-month high, and exports rose from 57.5 to 59.5, a two-month high. On the weaker side, business activity fell from 65.2 to 59.9, prices paid decreased from 64.3 to 57.6 and backlog of orders declined from 55.5 to 50.5 in December, an eleven-month low. Additionally, imports fell from 54.5 to 53.5, and supplier deliveries dropped from 56.5 to 51.5, the weakest reading since August 2017. Finally, employment declined from 58.4 to 56.3, a five-month low.
· Factory Orders (Jan 7) – November data release postponed due to the government shutdown.
· Empire Manufacturing (Jan 15) – The Empire Manufacturing Index declined 7.6 points to a reading of 3.9 in January, more than the expected decline to a reading of 10.0, according to Bloomberg, and the lowest reading since May 2017. In the details, work hours rose slightly from 6.7 to 6.8 in January, a two-month high. On the weaker side, prices paid declined from 39.7 to 35.9, new orders dropped from 13.4 to 3.5 and employment fell from 17.5 to 7.4 in January, a one-year low. Additionally, shipments fell from 20.3 to 17.9 at the beginning of the year, a four-month low.
· Industrial Production (Jan 18) – Industrial production rose 0.3% in December, a tenth of a percentage point more than expected, according to Bloomberg, and following a 0.4% rise the month prior, revised down from 0.6%.
· Capacity Utilization (Jan 18) – Capacity utilization rose a tenth of a percentage point to 78.7% in December, more than the expected fall to 78.5%, according to Bloomberg, and nearly a four-year high.
· Philly Fed Business Outlook Survey (Jan 17) – The Philly Fed Index rose from 9.1 to a reading of 17.0 in January, more than the expected rise to 9.5, according to Bloomberg, and a three-month high. In the details, new orders gained from 13.3 to 21.3 in January, a six-month high. On the weaker side, prices paid declined from 38.9 to 32.7, shipments fell from 12.4 to 11.4 and employment decreased from 19.1 to 9.6 at the beginning of the year, the lowest reading since September 2017.
· Richmond Fed Manufacturing (Jan 23) – The Richmond Fed Index rose from -8 to a reading of -2 in January, as expected, according to Bloomberg, albeit the second consecutive reading below zero.
· Kansas City Fed Manufacturing (Jan 24) – The Kansas City Fed Index fell from 6, revised from a reading of 3, to a reading of 5 in January, the lowest level since November 2016. Despite moving lower, the index has maintained a positive reading for twenty-six consecutive months, matching the streak in 2010-2012.
· Durable Goods (Jan 25) – December data release postponed due to the government shutdown.
· Capital Goods (Jan 25) – December data release postponed due to the government shutdown.
· Dallas Fed Manufacturing (Jan 28) – The Dallas Fed Manufacturing Outlook Index pushed into positive territory for the first time in two months, rising from a reading of -5.1 to +1.0 in January a two-month high.
· Chicago PMI (Jan 31) – The Chicago PMI fell from 63.8 to a reading of 56.7 in January, more than the expected decline to 61.5, according to Bloomberg, and a two-year low. In the details, only one of the five components – employment – improved at the start of the year.
Housing Market Activity
· Construction Spending (Jan 3) – November data release postponed due to the government shutdown.
· NAHB Housing Market Index (Jan 16) – The NAHB Housing Market Index rose 2 points from 56 to a reading of 58 in January, a two-month high. According to Bloomberg, the index was expected to remain unchanged at a reading of 56 for the second consecutive month.
· Building Permits (Jan 17) – December data release postponed due to the government shutdown.
· Housing Starts (Jan 17) – December data release postponed due to the government shutdown.
· Existing Home Sales (Jan 22) – Existing home sales declined 6.4% in December from 5.32m to a 4.99m unit pace, the lowest level since November 2015. Year-over-year, existing home sales are down 10.3%, the tenth consecutive month of negative activity. Single family sales fell 5.5% and multi-family sales declined 12.9%. Year-over-year, single family sales fell 10.1% in December, and multi-family sales declined 11.5%. From a price standpoint, the median price of a previously owned home rose 2.9% in December from a year earlier to $254k.
· S&P/CS 20 City Index (Jan 29) – The S&P Case-Shiller 20 City Home Price Index rose 0.3% in November, less than the 0.4% rise expected, according to Bloomberg, and a three-month low. Year-over-year, house prices rose 4.7%, down from 5.0% in the previous month, and the slowest pace in nearly four years.
· Pending Home Sales (Jan 30) – Pending home sales unexpectedly declined 2.2% in December, the third consecutive month of decline. According to Bloomberg, pending home sales were expected to rise 0.5% at the end of 2018. Year-over-year, pending home sales fell 9.5% in December, the eighth consecutive month of decline.
· New Home Sales (Jan 31) – New home sales unexpectedly popped 16.9% from 562k to a 657k unit pace in November, an eight-month high. According to Bloomberg, new home sales were expected to rise 4.8% in November. With a rise in the pace of sales, the months’ supply of new homes fell from 7.0 to 6.0 months, the lowest since June. From a price standpoint, the median cost of a newly constructed home declined 7.0% from the month prior to $302k. Year-over-year, new home prices fell 7.7% in November, the third consecutive month of decline.
Trade and Currency
· U.S. Dollar
o (Jan 11) – The dollar declined following dovish comments from Federal Reserve Chairman Jerome Powell. Powell underscored the message of “patience” as well as a need for the Fed to continue to shrink its balance sheet. The dollar traded down 0.2% at $95.22.
· Trade (Jan 8) – November data release postponed due to the government shutdown.
· Import Prices (Jan 16) – Import prices declined 1.0% in December, less than the 1.3% decline expected, according to Bloomberg, and following a 1.9% decline the month prior, revised lower from 1.6%. Year-over-year, import prices fell 0.6%, the first annual decline since October 2016, and following a 0.5% gain in November. Trade prices declined an average of 0.1% per month throughout 2018.
Monetary Policy, Reports, and Commentary
· Atlanta Fed GDPNow Forecast
o (Jan 22) – Following a larger-than-expected decline in December existing home sales, the Atlanta Fed revised down its Q4 GDP forecast from 2.8% to 2.7%, significantly below earlier estimates of 3.0%.
· Fed Speak
o (Jan 4) – According to Federal Reserve Chairman Jerome Powell, the December jobs report was “strong.” Although, speaking alongside former Federal Reserve leaders Yellen and Bernanke at the annual meeting of the American Economic Association in Atlanta, Powell emphasized the Committee’s data-dependency and flexibility, suggesting policymakers will first closely assess the data before moving ahead with any additional rate hikes. The emphasis on patience offered a welcome calm to markets fearful the Fed will continue to firm rates against the backdrop of a weakening economy. “With the muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves,” Powell said at the event.
o (Jan 11) – Speaking at the Economic Club of Washington, Federal Reserve Chairman Jerome Powell reiterated the Fed’s data-dependent stance and a need for patience as policymakers assess the evolution of the economy. While the Chairman suggested there was not an elevated risk of recession in the U.S., policymakers were concerned regarding global growth. Powell went on to suggest the Fed’s balance sheet would be "substantially smaller” from the current $4.1T as the Committee continues to unwind years of asset purchases. Aside from policy initiatives, Powell also said President Trump has not asked for a meeting despite attacks against him.
· January 30th FOMC Rate Decision – As expected, the Fed opted to keep rates unchanged at a range of 2.25% to 2.50% at its January 30th FOMC meeting. In the statement, the Fed continued to emphasize the strength of the domestic economy noting “solid” growth and robust household spending. Inflation, furthermore, remains “near” the Fed’s 2% objective. At the same time, the Fed reiterated a data-dependent stance, suggesting policy officials could be “patient” in light of “global economic and financial developments and muted inflation pressures.” Separately, the Fed issued a statement on the balance sheet affirming the Fed’s willingness to address the pace of normalization “in light of economic and financial developments.” And furthermore, anticipates maintaining an “ample supply” of reserves as to mitigate the need for active management of reserves – i.e. controlling unwelcome volatility in the Fed funds market. The Fed does not yet see a need to adjust the current pace of roll-off but is likely to right size the balance sheet sooner than expected, potentially as early as the end of the year, as well as keeping the balance sheet larger than many previously anticipated. During the press conference, the Chairman reiterated the January statement’s positive characterization of the economy, noting the U.S. economy is in a “good place” with a “strong” jobs market and inflation near the Committee’s policy goals. There are, however, according to Powell cross currents in the international marketplace including uncertainty stemming from trade and Brexit among others. Thus, the case for additional rate increases has "weakened."
Domestic News and Activity
· Politics and the Trump Administration
o (Jan 8) – With little hope of a “breakthrough” compromise near-term regarding funding for the U.S. government, President Trump considered declaring a state of national emergency in order to circumvent Congress and force construction of a long-promised southern border wall between the U.S. and Mexico.
o (Jan 9) – President Trump addressed the American people urging support for border security as the administration attempts to solve and combat the humanitarian crisis at the border. Democrats later responded via House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer by demanding the president reopen the government first with promises of discussing border security at a later date.
o (Jan 10) – President Trump walked out of a meeting with Democratic lawmakers calling it “a total waste of time." Neither side appeared willing to compromise; Democrats wanted a budget to reopen the government without including funding for a border wall, while the president said he would not sign off on a budget that did not include funding for a border wall. With political ambition and identity politics as the driving motives behind each party’s respective positioning, claims from either side of the aisle to be acting for the best interests of the American people were seen as increasingly disingenuous.
o (Jan 11) – Visiting the U.S.-Mexico border, President Trump said he has "the absolute right to declare a national emergency" if a compromise over funding for the barrier cannot be reached in Congress. According to reports, the White House asked the Army Corps of Engineers to examine potentially diverting money from other projects and was also exploring requesting funds from the Pentagon via Homeland Security.
o (Jan 12) – The partial government shutdown which began in December reached record territory as the longest in U.S. history. Furthermore, despite more than three weeks, neither side appeared any more willing to budge from their respective positions.
o (Jan 16) – According to newly-reported White House estimates, the cost of the partial government shutdown essentially doubled. The Trump administration had initially estimated the shutdown would cost the economy one-tenth of a percentage point in growth every two weeks. Updated figures suggest the cost is 0.13 percentage points each week. A government shutdown can have detrimental effects, albeit mostly a temporary impact on the economy as a number of agencies remain closed including Departments of Agriculture and Homeland Security and the U.S. Treasury. As a result, business permits or loans can be delayed, visas postponed, and most national parks closed. And of course, there are the hundreds of thousands of furloughed workers for whom pay will be delayed, although in most cases back pay is issued causing more monthly volatility than a permanent reduction to consumer spending.
o (Jan 16) – According to reports, junior representative Alexandra Ocasio-Cortez is slated to join the House Financial Services Committee. Speaking to The Hill, House Financial Services Committee Chairwoman Maxine Waters said she would welcome Cortez although the final decision had not been made.
o (Jan 17) – The House yet again passed a bill to reopen the government that got nowhere. The latest version of the House bill still didn’t provide the White House’s funding for a border wall between the U.S. and Mexico. It did include $12.1 billion in disaster aid but prohibited President Trump from diverting funds for border security.
o (Jan 17) – The WSJ quoted Treasury Secretary Steven Mnuchin as saying Washington could ease tariffs on Beijing, although U.S. Trade Representative Robert Lighthizer pushed back against the suggestion. Even if a trade deal is reached, there is no guarantee that the administration will relieve the tariffs put in place over the past 18 months. A trade deal sooner than later, however, could stave off additional tariffs on the remaining balance of Chinese goods and/or additional levies on the $200 billion of Chinese goods already targeted.
o (Jan 18) – “Out of consideration for the 800,000 great American workers not receiving pay and to ensure his team can assist as needed, President Trump has canceled his Delegation's trip to the World Economic Forum in Davos, Switzerland," Press Secretary Sarah Sanders said in a statement. According to reports, President Trump had already canceled his own trip, but Steven Mnuchin, Mike Pompeo, Wilbur Ross, Robert Lighthizer and Chris Liddell were slated to attend the meeting.
o (Jan 22) – In the latest outlook report, the International Monetary Fund pared back its world growth outlook for 2019 from 3.7% to 3.5%, citing among other issues the escalating trade war between China and the U.S. Risks to economic growth are “tilted to the downside,” the details read, noting the threat of a widening trade war, Brexit and a steeper-than-anticipated slowdown in China. “A range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt," the IMF report stated.
o (Jan 22) – President Trump outlined new plans to open the government. His latest border security proposal, however, which included $5.7 billion to pay for steel barriers on the U.S.-Mexico border was unlikely to yield the 60 votes necessary to clear procedural hurdles. Aside from TSA delays with absences among U.S. airport security officers rising to a record 10%, the shutdown stalled the approval of new loans, initial public offerings, the processing of tax documents and the approval of new products such as prescription drugs, among other effects. Government data was also not being released.
o (Jan 24) – President Trump said he will wait until the government is re-opened before he gives his State of the Union Address to Congress and added that he wasn’t looking for an alternate site for the annual speech since no venue can compete with the importance of the House Chamber. The address was delayed after House Speaker Nancy Pelosi failed to extend an invitation to the president to address a joint session of Congress on the originally scheduled date of January 29th.
o (Jan 25) – According to reports, in the latest bid to potentially end the stalemate, the White House pushed for a "large down payment" on the proposed border wall as part of a deal to reopen the government for at least a few weeks. The idea was proposed after six Republican senators voted across party lines to advance a bill from the Democrats on opening the government. "All of us believe if we have three weeks with the government open that we could find a way forward to produce a bill that he would sign, that would be good for everybody in the country," Republican Senator Lindsey Graham declared on the Senate floor. Democrats, however, were expected to counter the White House down payment proposal with an offer to boost border security without specifically setting aside funds for a physical wall.
o (Jan 25) – President Trump was reportedly still considering a declaration of a national emergency. According to reports, the administration has identified $7B in potential funds for the border wall including $681M from Treasury forfeiture funds, $3.6B in military construction, $3B in Pentagon civil works funds and $200M in Department of Homeland Security funds.
o (Jan 25) – After 35 days, President Trump signed a bill temporarily funding the government until February 15th and ending the five-week government shutdown, the longest in history. While many federal workers took a sigh of relief with back pay being issued as part of the temporary deal, without further negotiations resulting in a longer-term compromise, after 21 days the government will likely shut down again.
o (Jan 25) – According to the Brookings Institution, states in the U.S. Midwest will continue to be hit hard by job automation. The details of the report specifically indicate that jobs in trucking, office work, construction, food preparation and service areas are all seen as “at risk from advances in artificial intelligence, robotics and new forms of automation.”
o (Jan 28) – President Trump said another government shutdown is "certainly an option.” Speaking in an interview with the WSJ, he reportedly quoted the odds at less than 50-50: “I personally think it’s less than 50-50, but you have a lot of very good people on that board.”
o (Jan 29) – According to the Congressional Budget Office, the 35-day government shutdown will cost the U.S. about $3B in reduced output in 2019, shaving roughly four-tenths of a percentage point off Q1 GDP. By comparison, the costs of the 1995 shutdowns totaled some $1.4 billion, with estimates suggesting the total impact was potentially higher, shaving off 0.25%-0.5% percentage points from Q4 1995 GDP.
International News and Activity
· European Union
o (Jan 8) – German factory output unexpectedly slipped 1.9% in November, marking the third straight month of decline. As such, many concluded the Eurozone's economic powerhouse may be headed for recession. In the third quarter, growth data showed the German economy fell by 0.2%, the first quarterly decline since Q1 2015.
o (Jan 14) – Greek Prime Minister Alexis Tsipras called for a confidence vote after his coalition ally stepped down leaving the PM without a parliamentary majority and facing the possibility of snap elections. Greece's right-winged defense minister resigned in protest of a deal ending a long-running dispute with Macedonia over its name, and took his other six ministers in the cabinet with him.
o (Jan 15) – According to flash data, German GDP grew 1.5% in 2018, compared to 2.2% in 2017, marking the weakest growth rate in five years. According to the details, a global trade war-induced economic slowdown, as well as delays in auto output due to tougher pollution standards are at the forefront of the weakness in Europe’s largest economy.
o (Jan 17) – Greek Prime Minister Alexis Tsipras won a motion of no-confidence after five opposition lawmakers broke ranks to cast votes in favor of the government.
o (Jan 18) – Germany and China signed a trade agreement aimed at strengthening market interaction between the two nations. According to reports, the agreement strengthens coordination in banking, finance and capital markets, “pledging to further open market access and deepen cooperation to broaden economic ties.”
o (Jan 24) – The ECB opted to keep policy unchanged at its latest meeting, as expected. After all, the European Central Bank had previously announced that rates wouldn’t be raised until at least the end of the summer and furthermore committed to maintaining the size of its balance sheet through principal reinvestment. The unexpected portion of the announcement stemmed from the directional classification of risk with the Central Bank acknowledging that risks to the Eurozone economic outlook are now skewed to the downside. “The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties,” ECB President Mario Draghi said at the news conference following the rate decision.
o (Jan 28) – According to a government-appointed commission, Germany should shut down all of its coal-fired power plants by 2038 at the latest, proposing at least €40B in aid to regions affected by the phase-out. According to Bloomberg, renewables made up more than 40% of Germany's energy mix in 2018 surpassing coal for the first time after a 2011 decision to halt nuclear power. While many applaud the directional momentum towards renewables, the cost could exacerbate the country’s woes.
· The U.K.
o (Jan 8) – According to The Telegraph, U.K. officials "put out feelers,” potentially requesting an extension to Article 50, a part of the Lisbon Treaty which sets out the conditions for leaving the EU. In response to the story, some U.K. officials vehemently denied any delay; "We are leaving on the 29th of March," British Brexit Secretary Stephen Barclay declared, shooting down the report.
o (Jan 11) – Britain’s economy “cooled” with growth expanding at a 0.3% pace in the three months through November, the weakest pace in six months.
o (Jan 16) – The U.K. parliament voted down British Prime Minister Theresa May’s Brexit deal in a 432 to 202 vote. Markets, however, seemed less rattled than feared perhaps because the next step for the U.K. is unclear. Many believe London will have no choice but to delay its Brexit deadline amid a no-confidence motion and a firm stance from the EU that it won't renegotiate.
o (Jan 16) – Inflation in Britain retreated at year-end. December consumer prices rose 2.1%, down from 2.3% the previous month and the lowest level in nearly two years. Coupled with Brexit uncertainty, a – further – retreat in inflation could stave off the BOE Governor Mark Carney’s apparent desire to raise rates for the second time in six months at the February 7th meeting.
o (Jan 17) – After facing a crushing defeat with the U.K. parliament voting down the latest Brexit deal, British Prime Minister Theresa May won a confidence vote in the House of Commons. May faces another daunting hurdle of presenting Brexit “plan B.”
o (Jan 22) – According to reports, U.K. Labour Party leader Jeremy Corbyn announced support of a plan that would give politicians an opportunity to vote on whether the country should hold a second referendum on its membership in the European Union. This marked the first time the opposition leader specifically added his name to a proposal in Parliament that could potentially result in a second-round public vote, leaving the U.K.’s Brexit policy essentially deadlocked.
o (Jan 25) – According to The Sun, Northern Ireland's Democratic Unionist Party privately backed Prime Minister Theresa May's Brexit deal on a conditional basis in the upcoming vote. The report suggested Brexiteers see May's option as the more attractive relative to a referendum or a possible Remain outcome.
o (Jan 28) – According to a letter from Boris Johnson in The Telegraph, in an attempt to break the deadlock over Brexit, British Prime Minister Theresa May is seeking permanently binding changes regarding the Irish backstop. According to a senior government official, “If the PM secures a 'Freedom Clause' – for the U.K. to escape the backstop without reference to the bloc – I have no doubt that she will have the whole country full- throatedly behind her.”
· China
o (Jan 9) – U.S.-China trade talks extended for a third day boosting optimism that the two sides could reach an agreement and avoid an all-out confrontation. According to the WSJ, progress was seen on issues including purchases of U.S. farm and energy commodities, as well as increased access to China's markets. The two sides, however, are still reportedly at odds over Chinese structural reforms that would stop alleged theft and forced U.S. technology transfer.
o (Jan 10) – China's consumer price index dropped to 1.9% in December, well below the 3% upper limit set by the PBOC.
o (Jan 11) – China lowered its economic growth target in 2019 to a range of 6%-6.5% compared with last year's target of "around" 6.5%.
o (Jan 14) – Chinese exports unexpectedly fell 4.4% in December from a year earlier with imports down 7.6%.
o (Jan 15) – China announced it would start implementing a package of stimulus measures including a reduction in the VAT for selected industries and tax rebates for others to boost its economy. The measures are hoped to not only improve the outlook for the domestic Chinese economy, but also ease fears of a global slowdown. Also, according to reports, senior policy officials pledged tax reductions on a "larger scale."
o (Jan 22) – According to Chinese officials, the Chinese economy grew by 6.6% in 2018, the slowest annual pace since 1990.
o (Jan 23) – According to officials, China will increase its fiscal spending in 2019 to help offset last year's “turbulence” from the U.S.-China trade tensions. The latest figures showed fiscal spending reportedly rose 9% to 22.1T yuan.
o (Jan 24 ) – China added gold to its foreign reserves in December for the first time in two years. Coupled with paring U.S. Treasury purchases, the addition compounds the notion of the world’s second-largest economy trimming dependence on the U.S. dollar. Gold held by China increased by nearly 10 tons to 1,852 tons. Treasury holdings, meanwhile, dropped for the fifth straight month. Although even with recent reductions, China remains the largest net holder at $1.14T.
o (Jan 28) – China’s industrial profits fell 1.9% in December from a year earlier to 680.8B yuan ($100.9B) following a 1.8% decline in November – the first contraction in profits in nearly three years. According to the details, the decline was the result of weak factory-gate prices, soft demand and a protracted U.S.-Sino trade war.
· Japan
o (Jan 7) – The Japanese services PMI fell from 52.3 to 51.0 in December, a three-month low. According to reports, the weakness stemmed from a number of factors including soft sales demand and rough weather.
o (Jan 23) – The Bank of Japan held interest rates steady at its latest meeting on January 22nd as expected. Short-term rates were held at -0.1% with long-term rates closer to zero. The central bank furthermore cut its core consumer inflation forecast from 1.4% to 0.9%. The decision, while widely anticipated, followed news of weak export data: Japanese exports fell 3.8% in December, the most in two years.
-Lindsey Piegza, Ph.D., Chief Economist