Month-In-Review: September 2019

While the Fed opted to cut rates in September for the second time in three months, the Committee continued to describe policy action as preventative against potential shocks, as opposed to defensive measures against a slowing economy. Without a commitment to a further reduction in rates, however, the market continues to question the Committee’s resolve to support the economy going forward in a slower growth environment. At the same time, House Democrats launched a formal impeachment inquiry into President Trump’s dealings with Ukraine, fueling market uncertainty and compounding the pressure on monetary policy leaders to offer needed stimulus with fiscal policy leaders restrained by partisan politics. Meanwhile, a continued deterioration in global production data fueled concerns of slowing global growth, while further setbacks in trade talks undercut optimism that a lasting deal would eventually be reached between the world’s two largest economies despite recent concessions and months of ongoing negotiations.

Market Activity and Commodities

·      Equities – Equities ended higher in September after posting steep declines in August and marking the second worst month of the year; beginning at 2,926.46, the S&P 500 rose 1.7% at the end of Q3, closing at 2,976.74. The Dow, meanwhile, gained 2.0% in September from 26,403.28 to 26,916.83. For the quarter, both the Dow and S&P 500 rose 1.2%. Since the start of 2017, U.S. equities rose an average 36%.

·      Treasuries – Treasury yields also ended the month of September higher. The 10-yr Treasury yield rose 17bps from 1.50% to 1.67% at the end of Q3 after hitting a low of 1.46% on the 3rd, the lowest since July 2016. The 2-yr Treasury yield, meanwhile, rose 11bps in September, closing at 1.62%. Since the start of the year, the 2-yr fell 87bps and the 10-year dropped 102bps.

·      Oil     

o  (Sep 16) – Oil prices surged following drone strikes on the heart of the Saudi oil industry, which forced the kingdom to shut down half of its crude production, or roughly 5.7M barrels a day. Yemen's Iranian-aligned Houthi rebels claimed credit for the attack, saying they sent 10 drones to strike at the country’s all-important Aramco facilities, including the world's largest oil processing plant and a major oil field. WTI futures jumped as much as 15.5% to $63.34, according to Bloomberg, the biggest intraday percentage gain since June 22, 1998.

o  (Sep 18) – The Saudi Arabian oil ministry announced it would fully restore output by the end of September. Following the announcement, oil prices traded down 1.0% at $58.31 a barrel.

o  (Sep 23) – Following reports that the Pentagon deployed additional troops to the Gulf to strengthen Saudi air and missile defenses, oil prices rose nearly 1% to $58.66 a barrel.

National Growth and Outlook

·      NFIB Small Business Optimism (Sep 10) – The NFIB Small Business Optimism Index declined from 104.7 to a reading of 103.1 in August, more than the expected decline to 103.5, according to Bloomberg, and a five-month low.

·      Leading Index (Sep 19) – The Leading Index was flat in August, a two-month low. According to Bloomberg, however, the index was expected to decline 0.1% in the second month of Q3.

·      Chicago Fed National Activity Index (Sep 23) – The Chicago Fed National Activity Index rose from -0.41, revised down from a preliminary reading of -0.36, to a reading of +0.10 in August, more than the expected rise to -0.03, according to Bloomberg, and a two-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 August, 44 of the 85 monthly individual indicators made positive contributions, while 41 made negative contributions.

·      GDP (Sep 26) – GDP was unrevised at 2.0% in the final Q2 report, as expected, according to Bloomberg, and following a 3.1% increase at the start of the year. Year-over-year, GDP increased 2.3%, down from 2.7% the quarter prior, and the slowest pace in two years. In the details, personal consumption was revised down a tenth of a percentage point to 4.6% in the third-round Q2 report, still, however, the largest increase since Q4 2014, due to a downward revision in goods consumption. Goods consumption was revised lower from 8.8% to 8.6% in Q2, with nondurable goods revised down from 6.8% to 6.5%, while durable goods were unrevised at 13.0%. Services consumption was also unrevised at 2.8% in final Q2 report, a three-quarter high. Gross private investment, on the other hand, was revised to a larger 6.3% drop, the largest decline since Q1 2011, with inventories revised slightly higher from $69.0B to $69.4B, still a four-quarter low. Nonresidential investment, including office buildings and factories, was revised down from a 0.6% decline to a 1.0% drop following a 3.2% gain in Q1. Structures investment was revised down from a 9.4% decline to an 11.1% drop, and intellectual property investment was revised down a tenth of a percentage point to 3.6%, while equipment investment was revised up from 0.7% to 0.8% April to June. Residential investment, meanwhile, was also revised lower one-tenth of a percentage point to -3.0% in the final second-quarter report, marking the sixth consecutive quarter of decline. On the trade side, exports were revised up one-tenth of a percentage point to a 5.7% decline, a three-quarter low, and imports were revised lower a tenth of a percentage point to 0.0%, resulting in a net contribution of -0.68% to headline growth. Finally, government consumption was revised up three-tenths of a percentage point to 4.8% in the final Q2 report. Federal spending was revised higher from 8.1% to 8.3%, and state and local spending was revised up from 2.3% to 2.7% in the third-round Q2 report, a two-quarter low.

Employment

·      Jobless Claims

o  (Sep 5) – Initial jobless claims rose 1k from 216k to 217k in the week ending August 31. The four-week average increased from 215k to 216k.

o  (Sep 12) – Initial jobless claims fell 15k from 219k to 204k in the week ending September 7. The four-week average, however, remained at 212k.

o  (Sep 19) – Initial jobless claims rose 2k from 206k to 208k in the week ending September 14. The four-week average, however, declined from 217k to 213k.

o  (Sep 26) – Initial jobless claims rose 3k from 210k to 213k in the week ending September 21. The four-week average, however, declined from 213k to 212k.

·      Nonfarm Payrolls (Sep 6) – Nonfarm payrolls rose 130k in August, less than the 160k gain expected, according to Bloomberg, and a three-month low. July payrolls were revised down from 164k to 159k and June payrolls were revised lower from 193k to 178k. Thus, the overall change in nonfarm payrolls (August data + net revisions) was 110k. The three-month average, however, rose from 133k to 156k, and the six-month average increased from 137k to 150k. In the details, private payrolls increased 96k in August, following a 131k gain in July. Goods-producing payrolls rose 12k, due to a 14k increase in construction payrolls and a 3k rise in manufacturing payrolls in the second month of Q3, a three-month low. Service producing payrolls increased by 84k in August, following a 133k rise the month prior. Education and health payrolls gained 32k and business services payrolls rose 37k, thanks to a 15k gain in temporary help payrolls, the largest monthly gain since May 2017. Additionally, financial payrolls rose 15k in August, and leisure and hospitality payrolls increased 12k, a three-month high. Information payrolls, meanwhile, were flat in August for the second consecutive month while trade and transport payrolls, declined 11k, thanks to an 11k drop in retail payrolls, the seventh consecutive month of decline. Government payrolls rose 34k in the second month of Q3, a one-year high, with federal employment rising 28k.

·      Participation Rate (Sep 6) – The civilian labor force rose by 571k in August, following a 370k gain the month prior. As a result, the participation rate inched up two-tenths of a percentage point to 63.2%, a six-month high.

·      Unemployment Rate (Sep 6) – Household employment rose by 590k in August, following a 283k rise the month prior. With a 571k rise in the labor force, however, the unemployment rate remained at 3.7% in August for the third consecutive month.

·      Average Hourly Earnings (Sep 6) – Average hourly earnings rose 0.4% in August, a tenth of a percentage point more than expected, according to Bloomberg, and a six-month high. Year-over-year, wages rose 3.2% in August, more than the 3.0% rise expected, albeit a two-month low and down from the near-term peak of 3.4% reported in February.

·      Average Weekly Hours (Sep 6) – The average workweek rose from 34.3 to 34.4 hours in August, a two-month high.

·      JOLTS (Sep 10) – According to JOLTS – the Job Openings and Labor Turnover Survey – the number of job openings declined from 7.25m, revised lower from 7.35m, to 7.22m in July, a five-month low. According to Bloomberg, the number of job openings was expected to decline to 7.33m.

Consumer Activity and Confidence

·      Vehicle Sales (Sep 4) – Total vehicle sales unexpectedly rose 0.9% from 16.82m to a 16.97m unit pace in August, a two-month high. According to Bloomberg, vehicle sales were expected to decline 0.1% to a 16.80m unit pace. Year-over-year, vehicle sales rose 2.2% in the second month of Q3 following a 0.8% rise in July.

·      Consumer Credit (Sep 9) – Consumer credit rose $23.29b in July, more than the $16.00b rise expected, according to Bloomberg, and the most since November 2017. Monthly gains in consumer credit averaged $15.57b in 2018.

·      University of Michigan Consumer Sentiment

o  (Sep 13) – The University of Michigan Consumer Sentiment Index rose from 89.8 to a reading of 92.0 in the preliminary September report, more than the expected rise to 90.8, according to Bloomberg, and a two-month high. In the details, consumer expectations rose from 79.9 to a reading of 82.4, and consumers’ assessment of current conditions increased from 105.3 to 106.9 in the preliminary September report, a two-month high.

o  (Sep 27) – The University of Michigan Consumer Sentiment Index rose from 92.0 to 93.2 in the final September reading, more than the expected rise to 92.1, according to Bloomberg, and a four-month high. In the details, consumer expectations rose from a preliminary reading of 82.4 to 83.4 and consumers’ assessment of current conditions improved from 106.9 to 108.5 in the final September report, a two-month high.

·      Retail Sales (Sep 13) – Retail sales rose 0.4% in August, double the rise expected, according to Bloomberg. Additionally, July sales were revised up a tenth of a percentage point to 0.8%, a four-month high. Year-over-year, retail sales increased 4.1% in the second month of the third quarter, a ten-month high and following a 3.6% annual rise the month prior. Car sales rose 1.8% in August following a 0.1% gain the month prior, while gasoline stations sales fell 0.9%, a two-month low. Excluding autos, retail sales were flat in August and increased 3.5% over the past 12 months. Excluding autos and gasoline, retail sales increased 0.1% in August and rose 4.2% year-over-year. In the details, building materials sales gained 1.4%, health and personal care sales rose 0.7%, and sporting goods sales increased 0.9%, a two-month high. Also, non-store retailer sales rose 1.6% following a 1.7% gain the month prior. On the weaker side, electronics sales were flat in August, while clothing sales declined 0.9%, and general merchandise sales fell 0.3%, thanks to a 1.1% drop in department store sales, a two-month low. Additionally, food and beverage sales fell 0.2%, and eating and drinking sales declined 1.2%, an eleven-month low.

·      Consumer Confidence (Sep 24) – The Consumer Confidence Index fell from 134.2, revised lower from 135.1, to a reading of 125.1 in September, more than the expected decline to a reading of 133.0, according to Bloomberg, and a three-month low. In the details, present situation fell from 176.0 to 169.0, and consumer expectations declined from 106.4 to 95.8 at the end of Q3, an eight-month low.

Inflation

·      PPI (Sep 11) – The PPI rose 0.1% in August, a tenth of a percentage point more than expected, according to Bloomberg, and following a 0.2% increase the month prior. Year-over-year, headline producer prices rose 1.8%, a three-month high. In the details, food prices declined 0.6%, following a 0.2% gain the month prior, and energy prices dropped 2.5% in August, a two-month low. Year-over-year, energy prices fell 6.9%, the fourth consecutive month of decline. Excluding food and energy costs, the core PPI increased 0.3% in the second month of Q3 and 2.3% over the past 12 months, a two-month high. Additionally, services costs rose 0.3%, due to 0.2% increase in trade costs and a 0.3% gain in transportation and warehousing costs in August, a two-month high. Other costs rose 0.5% following a 0.3% decline the month prior.

·      CPI (Sep 12) – The CPI rose 0.1% in August, as expected, according to Bloomberg, and following a 0.3% rise the month prior. Year-over-year, headline consumer prices rose 1.7% in the second month of Q3, down from the 1.8% pace reported in July, and a two-month low. Energy costs declined 1.9% in August, following a 1.3% gain the month prior, while food prices were flat for the third consecutive month. Excluding food and energy, the core CPI rose 0.3% in August, a tenth of a percentage point more than expected, according to Bloomberg, and following a similar increase the month prior. Over the past 12 months, the core increased 2.4%, the largest gain since July 2018. In the details, services costs rose 0.2% and housing prices increased 0.1%, thanks to a 0.2% rise in the OER. Additionally, recreation prices increased 0.5% and medical care prices rose 0.7% in the second month of Q3, the biggest monthly rise since 2016. On the weaker side, education and communication costs were flat, despite a 1.2% gain in personal computer costs, while commodities prices fell 0.3% and transportation prices dropped 0.6%, a two-month low.

·      PCE (Sep 27) – The PCE was flat in August, a seven-month low, and following a 0.2% rise the month prior. According to Bloomberg, the PCE was expected to rise 0.1% in the second month of the third quarter. Year-over-year, headline inflation increased 1.4% for the fourth consecutive month in August, as expected. Excluding food and energy, the core PCE rose 0.1% in August and increased 1.8% year-over-year, a seven-month high.

Manufacturing and Production Activity

·      ISM Manufacturing (Sep 3) – The ISM Manufacturing Index unexpectedly declined from 51.2 to a reading of 49.1 in August, the lowest since January 2016, and marking the first contraction (a reading below 50) in three years. In the details, backlog of orders increased from 43.1 to 46.3, and prices paid rose from 45.1 to a reading of 46.0 in August, a two-month high. On the weaker side, production fell from 50.8 to 49.5, supplier deliveries dropped from 53.3 to 51.4, and new orders declined from 50.8 to 47.2 in August, the lowest level since June 2012. Also, employment dropped from 51.7 to a reading of 47.4, exports declined from 48.1 to 43.3, and imports fell from 47.0 to 46.0, the lowest reading since December 2015.

·      Factory Orders (Sep 5) – Factory orders rose 1.4% in July, more than the 1.0% rise expected, according to Bloomberg, and following a 0.5% increase the month prior. Year-over-year, factory orders rose 0.4%, following two consecutive months of decline.

·      ISM Non-Manufacturing (Sep 5) – The ISM Non-Manufacturing Index rose from 53.7 to a reading of 56.4 in August, more than the expected rise to 54.0, according to Bloomberg, and a three-month high. In the details, business activity improved from 53.1 to 61.5 and prices paid gained from 56.5 to a reading of 58.2 in August, a two-month high. On the weaker side, backlog of orders fell from 53.5 to 49.0, supplier deliveries decreased 1 point to 50.5 and employment dropped from 56.2 to 53.1 in August, the lowest reading since March 2017. Additionally, exports and imports both declined from 53.5 to a reading of 50.5.

·      Empire Manufacturing (Sep 16) – The Empire Manufacturing Index declined from 4.8 to a reading of 2.0 in September, more than the expected decline to 4.0, according to Bloomberg, and a three-month low. In the details, prices paid rose from 23.2 to 29.4 and employment improved from -1.6 to a reading of +9.7 in September, a five-month high. On the weaker side, shipments declined from 9.3 to 5.8 and new orders fell from 6.7 to 3.5, a three-month low.

·      Industrial Production (Sep 17) – Industrial production rose 0.6% in August, more than the 0.2% gain expected, according to Bloomberg, and a one-year high. 

·      Capacity Utilization (Sep 17) – Capacity utilization rose from 77.5% to 77.9%, three-tenths of a percentage point more than expected, according to Bloomberg, and a five-month high.

·      Philly Fed Business Outlook Survey (Sep 19) – The Philly Fed Index fell from 16.8 to a reading of 12.0 in September, less than the expected decline to 10.5, according to Bloomberg, albeit a three-month low. In the details, prices paid rose from 12.8 to 33.0, shipments increased from 19.0 to 26.4, and employment gained from 3.6 to reading of 15.8 at the end of Q3, a two-month high. On the weaker side, new orders fell 1 point to 24.8 in September, a two-month low.

·      Richmond Fed Manufacturing (Sep 24) – The Richmond Fed Index unexpectedly fell from +1 to a reading of -9 in September, a two-month low. According to Bloomberg, the index was expected to remain at a reading of +1 in September for the second consecutive month.

·      Kansas City Fed Manufacturing (Sep 26) – The Kansas City Fed Index rose from -6 to a reading of -2 in September, more than the expected rise to -4, according to Bloomberg, and a two-month high.

·      Durable Goods (Sep 27) – Durable goods orders unexpectedly rose 0.2% in August, following a 2.0% gain the month prior. According to Bloomberg, durable goods orders were expected to fall 1.1% in August. Year-over-year, however, headline orders dropped 4.2% in the second month of Q3, a two-month low. Transportation orders fell 0.4%, following a 7.2% increase the month prior, due to a 17.1% decline in civilian aircraft orders, a three-month low, and a 0.8% fall in vehicles and parts orders. Excluding transportation, durable goods orders rose 0.5% month-over-month in August but declined 1.3% over the past 12 months. In other details, primary metals orders rose 1.5%, fabricated metals orders increased 1.3%, and machinery orders gained 0.6% in the second month of Q3, a two-month high. On the weaker side, computers and electronics orders fell 0.3%, and electrical equipment orders declined 1.3%, a nine-month low.

·      Capital Goods (Sep 27) – Capital goods orders rose 0.2% in August, a three-month low. Nondefense capital goods orders declined 2.1% in the second month of the third quarter. Capital goods orders excluding aircraft and defense – a proxy for business investment – fell 0.2% in August, a four-month low. Year-over-year, business investment dropped 1.7% in August, following a 0.6% gain the month prior, and down from a recent peak of 13.3% in September 2017.

·      Dallas Fed Manufacturing (Sep 30) – The Dallas Fed Manufacturing Outlook Index fell from 2.7 to a reading of 1.5 in September, less than the expected decline to a reading of 1.0, according to Bloomberg, albeit a two-month low.

·      Chicago PMI (Sep 30) – The Chicago PMI declined from 50.4 to a reading of 47.1 in September, more than the expected decline to 50.0, according to Bloomberg, and a two-month low. In the details, two of the five components – prices paid and supplier deliveries – gained momentum at the end of Q3.

Housing Market Activity

·      Construction Spending (Sep 3) – Construction spending rose 0.1% in July, less than the 0.3% gain expected, according to Bloomberg, albeit a three-month high. Construction spending has averaged 0.1% over the last six months and fell 2.7% year-over-year at the start of the third quarter, the ninth consecutive month of decline.

·      NAHB Housing Market Index (Sep 17) – The NAHB Housing Market Index rose from 66 to a reading of 68 in September, an eleven-month high. According to Bloomberg, the index was expected to remain at a reading of 66 for the second consecutive month.

·      Building Permits (Sep 18) – Building permits unexpectedly rose 7.7% in August from 1,317k, to a 1,419k unit pace, a twelve-year high. According to Bloomberg, building permits were expected to decline 1.3% in August. Year-over-year, building permits rose 12.0% in August, the most since March 2017. Single family permits rose 4.5% in August and also increased 4.5% year-over-year, following ten consecutive months of decline. Multi-family permits gained 13.3% in August and rose 26.3% year-over-year, the most since November 2015.

·      Housing Starts (Sep 18) – Housing starts rose 12.3% in August, pulling the annual pace up from 1,215k to 1,364k, the highest level since June 2007. According to Bloomberg, starts were expected to rise 5.0% in the second month of the third quarter. Single family starts gained 4.4%, and multi-family starts popped 32.8% in August, following two consecutive months of decline. Year-over-year, housing starts rose 6.6% in the second month of Q3, following a 2.6% rise in July, thanks to a 3.4% rise in single family starts and a 14.1% increase in multi-family starts, a nine-month high. On a regional basis, starts rose in three out of the four regions of the country in the second month of the third quarter: starts rose 30.5% in the Northeast, 15.4% in the Midwest and 14.9% in the South, while starts were flat in the West.

·      Existing Home Sales (Sep 19) – Existing home sales unexpectedly rose 1.3% from 5.42m to a 5.49m unit pace in the second month of Q3, the most since March 2018. According to Bloomberg, existing home sales were expected to decline 0.7% in August. Single family sales rose 1.2% following a 2.8% gain in July, and multi-family sales increased 1.7%, a three-month high. Year-over-year, existing home sales rose 2.6% in August following a minimal 0.6% gain the month prior, with single family sales rising 2.9%, while multi-family sales were flat. From a price standpoint, the median cost of a previously owned home rose 4.7% in August from a year earlier to $278k.

·      S&P/CS 20 City Index (Sep 24) – The S&P Case-Shiller 20 City Home Price Index rose 0.02% in July, less than the 0.10% rise expected, according to Bloomberg, and an eleven-month low. Year-over-year, house prices cooled from 2.16% to 2.00%, the slowest pace since August 2012.

·      New Home Sales (Sep 25) – New home sales rose 7.1% in August from 666k to a 713k unit pace, more than the 3.8% rise expected, according to Bloomberg, and a two-month high. Year-over-year, sales rose 18.0% following a 9.4% rise the month prior. With a rise in the pace of sales, the months’ supply of new homes fell from 5.9 to 5.5 months, a two-month low. From a price standpoint, the median cost of a newly constructed home rose 7.5% in August from the month prior to $328k. Year-over-year, new home prices rose 2.2% in the second month of the third quarter.

·      Pending Home Sales (Sep 26) – Pending home sales rose 1.6% in August, more than the 1.0% rise expected, according to Bloomberg, and a two-month high. Year-over-year, pending home sales rose 1.1%, following a 1.7% gain the month prior.

Trade and Currency

·      U.S. Dollar

o  (Sep 24) – The dollar rose following uncertainty after House Democrats launched a formal impeachment inquiry into President Trump’s dealings with Ukraine. The dollar traded up 0.2% at $98.54.

·      British Pound

o  (Sep 6) – Lingering uncertainty over whether or not there would be another divorce delay continued to weigh on the pound. The pound traded down 0.22% at $1.23 against the U.S. dollar.

o  (Sep 24) – The sterling rose after the British Supreme court ruled that U.K. Prime Minister Boris Johnson’s suspension of Parliament for five weeks was unlawful. The pound traded up 0.46% at $1.25 against the U.S. dollar.

·      Trade (Sep 4) – The trade balance narrowed 2.7% from $55.5b to $54.0b in July, a three-month low. According to Bloomberg, however, the trade deficit was expected to narrow to $53.4b at the start of Q3.

·      Import Prices (Sep 13) – Import prices declined 0.5% in August, as expected, according to Bloomberg, and a two-month low. Year-over-year, import prices fell 2.0%, the fifth consecutive month of decline. Trade prices rose an average of 0.2% per month throughout the first half of the year.

Monetary Policy, Reports, and Commentary

·      Atlanta Fed GDPNow Forecast

o  (Sep 3) – Following an unexpected drop in manufacturing activity into contractionary territory for the first time in three years, the Atlanta Fed’s Q3 GDP forecast was revised down from 2.0% to 1.7%.

·      Fed Speak

o  (Sep 4) – Boston Fed President Eric Rosengren, one of two dissenting votes at the July FOMC meeting, spoke at an event held by the Meehan School of Business at Stonehill College in Easton, Massachusetts. In his comments, Rosengren suggested the economy was on relatively strong footing and furthermore did not “see a clear and compelling case for additional monetary accommodation at this time, given low unemployment near-record equity prices and an expected rise in inflation.”

o  (Sep 4) – Speaking in an interview with Reuters, St. Louis Fed President James Bullard suggested current conditions potentially warranted a more substantial, 50bps cut at the September 18th meeting, as it would be better “to go ahead and get realigned right now.”

o  (Sep 9) – Speaking in Zurich on the economic outlook, Fed Chairman Jerome Powell said the U.S. economy was still on “moderate” footing with a strong labor market and inflation continuing to rise closer to the Fed’s 2% target. The Chairman, furthermore, dismissed fears of a near-term recession both at home and abroad. Despite the relatively upbeat outlook, however, Powell did acknowledge “significant risks” facing the world economy given trade uncertainty, a global slowdown and muted inflation. He also pledged that central bankers would “act as appropriate” to continue the country’s longest-running expansion. Additionally, aside from an economic assessment, Powell reaffirmed the central bank’s autonomy from the federal government. The Chairman outright dismissed the idea that political influences or the 2020 election are factors influencing how the central bank is charting interest rates. “Absolutely not,” said Powell, “political factors have absolutely no role in our process. Our colleagues wouldn’t tolerate it in our discussions.”

o  (Sep 24) – Speaking at the 2019 U.S. Treasury Market Conference hosted at the Federal Reserve Bank of New York, New York Fed President John Williams reiterated Chair Powell’s resolve to continue to monitor volatility in repo rates and considered resuming balance sheet growth if necessary. In prepared remarks Williams said, “We will continue to monitor and analyze developments closely,” adding that officials “will assess the implications for the appropriate level of reserves and time to resume organic growth of the Federal Reserve’s balance sheet.”

o  (Sep 26) – Former Minneapolis Federal Reserve President Narayana Kocherlakota spoke out regarding the recent volatility in U.S. money markets. While suggesting the recent disruptions would not cripple the central bank’s ability to achieve its policy goals, in his opinion, it would suggest something was amiss in the functionality of the financial system. In an opinion piece published by Bloomberg News, the former Fed president said the “deeper issue” is that since the financial crisis, regulatory reforms “have constrained the ability of flush banks to lend, and of tight banks to borrow.” While the central bank can temporarily inject cash into the markets to control short-term rates, Kocherlakota suggested it’s difficult to understand how markets will respond longer-term or to future shocks.

o  (Sep 26) – According to Dallas Fed President Robert Kaplan, debt market volatility is signaling monetary policy on its own can't boost or stabilize growth. Speaking at the Federal Reserve Bank of Dallas, Kaplan said, "The marginal return in lowering the fed funds here has got diminishing returns. QE in the future may well have diminishing returns."

·      September 18th FOMC Rate Decision – The Fed opted to lower rates 25bps for the second time this year to a range of 1.75% to 2.00% at the September 18th meeting. The Fed also cut the interest paid on excess reserves (IOER) by 30bps in response to a funding squeeze in money markets. Assessing the economy, the Committee continues to see the economy rising at a “moderate rate” amid “solid” job gains, although inflation is “running below” 2%. As “uncertainties” about the outlook remain, however, the Committee will continue to “act as appropriate,” according to the September statement. September’s decision to lower rates, while widely expected, was hardly unanimous. St. Louis Fed President James Bullard voted in favor of a larger 50 basis point cut to a range of 1.50% to 1.75%, while Kansas City Fed President Esther George and Boston Fed President Eric Rosengren dissented in favor of maintaining the Federal funds rate at a range of 2.00% to 2.25%. According to the famed dot plot, five officials saw no need for further policy action this year, while another five expected rates to remain unchanged at the new, lower range of 1.75-2.00%. The remaining seven, however, forecast one more cut in 2019 with the Fed funds rate reaching 1.625% (1.50-1.75%).

Domestic News and Activity 

·      Politics and the Trump Administration

o  (Sep 6) – The Trump administration released a formal plan to end direct government control of Fannie Mae and Freddie Mac, placing them in private ownership. Under the plan, the two firms' profits would be used to build up a cushion against future economic downturns rather than being paid into the Treasury. Together the two entities back more than half of U.S. home mortgages and have been in government conservatorship for more than 11 years. Leaders from both sides have long promised to abolish the entities, although many continue to argue an explicit government guarantee is necessary to ensure a stable supply of available mortgage credit.

o  (Sep 11) – California lawmakers approved legislation that would require companies like Uber and Lyft to treat contract workers as employees. According to estimates, the change could increase costs for the firms by as much as 30% as a result, and could also end up hurting those people who want to work flexible hours. The bill, known as Assembly Bill 5, is also expected to influence other states as a number of labor groups are pushing similar legislation in New York, Washington state and Oregon.

o  (Sep 12) – President Trump offered a "goodwill gesture" to China, delaying a further increase in tariffs (25% to 30%) on $250B worth of goods by two weeks until October 15. Furthermore, China was said to be considering renewed imports of American farm goods such as soybeans and pork as a reciprocal goodwill move.

o  (Sep 13) – President Trump said his administration would consider further tax reform. During a speech before House Republicans in Baltimore, Trump suggested plans to unveil a tax overhaul plan aimed at middle-income households in 2020. "It will be a very, very substantial tax cut for middle-income folks, who work so hard," he declared, adding that it's going to be something that "everyone's really looking for." Earlier proposals of tax reform, including indexing capital gains and a payroll tax cut, had reportedly been ruled out by the administration.

o  (Sep 16) – Amid the spike in oil prices following drone strikes in Saudi Arabia, President Trump authorized a release of crude from the Strategic Petroleum Reserve, as necessary, adding he was "locked and loaded" for a response "depending on verification."

o  (Sep 17) – The U.S. reached an initial trade agreement with Japan on tariff barriers and digital trade that won't require congressional approval. Little details beyond the baseline achievement, however, were provided including whether or not President Trump had agreed to rule out implementing tariffs on Japanese automobiles.

o  (Sep 20 ) – The U.S. temporarily exempted more than 400 types of Chinese products including Christmas lights, plastic straws and printed circuit boards from tariffs. According to documents published by the Office of the U.S. Trade Representative, the exemptions stem from more than 1,100 exclusion requests made by American companies and other entities.

o  (Sep 20) – Short-term funding markets were recovering from a liquidity squeeze which sent repo rates to 10%, according to Bloomberg. The New York Fed conducted another $75B repurchase operation, its fourth in as many days, to help maintain the Federal funds rate within the new, lower target range of 1.75%-2.00%. Many believed the interest rate spike was on account of policy becoming too restrictive on multiple fronts, including earlier balance sheet reduction, which left the market with too few dollars relative to Treasury demand.

o  (Sep 23) – The Fed continued to inject liquidity into the market in an attempt to better control short-term interest rates, which unexpectedly spiked as banks struggled to meet reserve requirements. Fed Chair Jerome Powell, however, continued to downplay concerns, saying it was not a sign of problems in the wider economy or a concern for monetary policy. According to reports, the New York Federal Reserve will offer up to $75B a day in repurchase agreements over three weeks’ time. In addition, it will offer three 14-day "repo" operations of at least $30B each.

o  (Sep 24) – According to Treasury Secretary Steven Mnuchin, U.S.-China trade talks will resume in October. Chinese importers, furthermore, agreed to buy around 600,000 tonnes of U.S. soybeans to be shipped from Pacific Northwest ports from October through December.

o  (Sep 25) – Speaking at the United Nations General Assembly in New York, President Trump delivered a “stinging rebuke of China's trade practices.” "Not only has China declined to adopt promised reforms, it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers and the theft of intellectual property," Trump told the United Nations General Assembly.

o  (Sep 25) – Speaker of the House Nancy Pelosi announced Democrats in Congress formally launched an impeachment inquiry into the President's dealings with Ukraine. The White House released an unredacted transcript of the President’s call with Ukrainian leader Volodymyr Zelensky in July, while White House intelligence panel chief Adam Schiff asked the whistle-blower to meet members. The President slammed the impeachment proceeding, tweeting, "There has been no President in the history of our Country who has been treated so badly as I have…The Democrats are frozen with hatred and fear."

o  (Sep 26) – Primary dealers continued to ramp-up demand for money market liquidity. According to Bloomberg, the Fed's term-repo operation was oversubscribed even after it doubled the maximum size of the offering to $60 billion.

o  (Sep 26) – The whistleblower complaint at the heart of the Trump impeachment inquiry was released to the public. Meanwhile, the Trump administration continued to voice frustration, with the President predicting downward pressure on equities and a potential reversal of economic gains if the impeachment inquiry proceeded. "If they actually did this the markets would crash," President Trump tweeted.

o  (Sep 27) – Following National Intelligence Director Joseph Maguire’s testimony before Congress, Speaker of the House Nancy Pelosi accused Attorney General William Barr of going “rogue" and the Justice Department of heading toward "a cover-up of the cover-up." According to Pelosi, President Trump appeared to have been disloyal to his oath of office by "jeopardizing our elections.”

International News and Activity 

·      European Union

o  (Sep 12) – The ECB unveiled fresh stimulus measures to prop up the ailing Eurozone economy. Hoping to jump-start consumption and investment, the ECB lowered its deposit facility rate from 0.1% to -0.5%. It also reintroduced QE; the ECB will buy €20B of bonds per month starting November 1. The duration is open-ended. Speaking at a press conference, ECB President Mario Draghi said that economic risks remain tilted to the downside, while growth and inflation forecasts were cut across the board – growth is now projected at 1.1% in 2019 and 1.2% in 2020, down from 1.2% and 1.4%, respectively. Inflation this year is expected to rise 1.2%, and 1.0% in 2020, and in 2021, it is now forecasted at 1.5%.

o  (Sep 23) – German factory activity slowed from 43.5 to 41.4 in September, the weakest in more than a decade. According to analysts, the car industry and Brexit are paralyzing orders which could leave Germany headed for recession.

·      The U.K.

o  (Sep 4) – U.K. lawmakers created yet another hurdle to British Prime Minister Boris Johnson's Brexit strategy, attempting to delay the country's exit from the EU by three months. The potential obstruction, however, prompted the British leader to call for a general election, although according to reports, a vote to delay a U.K. divorce seemed unlikely to succeed after the opposition said they wouldn't back the maneuver until a no-deal exit on October 31 was ruled out.

o  (Sep 5) – U.K. Prime Minister Boris Johnson failed in his bid to call a snap general election, essentially “boxing in" the U.K. prime minister over his Brexit strategy. Despite a string of defeats in Parliament, and the resignation of his own brother, however, Johnson appeared steadfast in his commitment to press ahead and deliver Brexit by October 31. According to reports, however, the U.K. government has limited options. It could try to bypass legislation requiring a two-thirds majority to approve a snap election, or Johnson could call a vote of no confidence in his own government with an expected abstention from his own MPs.

o  (Sep 6) – British Prime Minister Boris Johnson declared he’d “rather be dead in a ditch," than fail to deliver Brexit.

o  (Sep 10) – U.K. Prime Minister Boris Johnson will "press on with negotiating a deal, while preparing to leave without one.” Despite his opposition, however, lawmakers have voted to force Johnson to get a Brexit deal or seek a delay. Though according to insiders, Boris refuses to contemplate the latter and his team is seeking a way around the law. "This government will not delay Brexit any further," he said to Parliament, as lawmakers rejected another request to try to break the deadlock through an early national election, one of Parliament's last acts before a five-week shutdown.

o  (Sep 16) – Speaking to The Daily Telegraph, U.K. Prime Minister Boris Johnson said, “Despite the Remainer attempt to crush Brexit, I am working flat out to ensure we leave on Oct. 31.” According to the report, Johnson will outright reject any delay after Halloween and he's prepared to go to court to fight against any legal challenges that arise from his opponents on the matter.

o  (Sep 27) – According to Bank of England policymaker Michael Saunders, the BOE may need further rate cuts – and soon. Speaking to local businesses in Barnsley, northern England, Saunders said even if a no-deal Brexit is avoided, high levels of uncertainty would persist and act as a kind of "slow puncture" for the U.K. economy. “In this case, it might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage, especially if global growth remains disappointing."

·      China

o  (Sep 6) – The People's Bank of China (PBOC) reduced the amount of funds banks have to hold in reserve, cutting the reserve requirement ratio by 50bps. According to Bloomberg, this is the third action of its kind this year and the seventh since early 2008, releasing another 900B yuan ($126.35B) of liquidity into the world's second-largest economy.

o  (Sep 10) – Chinese factory prices dropped 0.8% from a year earlier in August, compounding fears of deteriorating economic conditions in the world’s second-largest economy to now include concerns of deflationary pressures.

o  (Sep 11) – China exempted 16 U.S. products from higher trade tariffs. The latest move came ahead of expected trade talks planned for October and would include whey and fish meal (animal feeds), as well as some lubricants and anti-cancer drugs. 

o  (Sep 16) – Chinese industrial output growth slowed from 4.8% to just 4.4% in August, the weakest in 17.5 years. Deteriorating trade relations remains at the heart of the weakness as well as softening domestic demand. Following the data release, Premier Li Keqiang said it would be "very difficult" for the economy to grow at 6% or more and that it faced "downward pressure."

o  (Sep 23) – Chinese trade officials cut their latest trip to the U.S. short, but described the discussions as "constructive.”

o  (Sep 25) – China was said to be seeking to increase purchases of U.S. pork products. The move, however, according to Bloomberg, should be seen as an act of necessity, not a sign of goodwill, as Beijing faces domestic shortages from swine flu.

o  (Sep 27) – China's top diplomat, Wang Yi, said Beijing was willing to buy more U.S. goods, adding trade negotiations would yield results if both sides "take more enthusiastic measures" to show goodwill and reduce "pessimistic language."

·      Argentina

o  (Sep 3) – Amid a growing economic crisis in Argentina, the central bank issued capital controls on businesses as the peso lost more than a quarter of its value since primary elections in August. While exporters and businesses will face limitations in the foreign exchange markets, the decision also reverses one of the first big achievements of President Macri who removed strict capital controls after taking office in December 2015.

-Lindsey Piegza, Ph.D., Chief Economist