BMA Market Insights: Triple Header with Three Key Central Banks Meeting, Starting with the Fed

The Federal Reserve slightly tempered their 2019 rate outlook signaling two potential rate hikes at their meeting last week. Previously, in September, the Fed projected three rate hikes next year. Nonetheless, at the post-meeting press conference, Chairman Powell reemphasized that policy does not need to be accommodative. Gradual rate increases will be warranted on the back of solid economic growth, strong labor market and inflation nearing the Committee’s objective of 2% in the medium-term. The Committee unanimously hiked the Fed funds rate by 25 basis points to 2.25-2.50%.

Headwinds to the rate hikes include softening global economy and increased market volatility, all of which is less supportive of growth. Going forward, the Fed’s balancing act becomes more acute. On one hand, it will do its best to monitor and prevent asset bubbles and inflation by hiking rates. On the other, the Committee will try to manage not raising rates too quickly to incite a recession.

Concerns regarding a softer global economy were noted by both the Bank of Japan and the Bank of England who both kept their key rates unchanged, as expected. Separately, the U.S. government partially shut down Friday at midnight as the Senate failed to pass a spending bill. President Trump has insisted he would not sign a bill that did not including $5 billion for the border wall.

Uncertainties surrounding a U.S. government shutdown, a weak global economic outlook, and a less dovish sentiment from the Federal Reserve all contributed to the market’s jitters as the Cboe Volatility Index rose above 30, a ten-month high. Equity markets continued to take a dive, with the Dow Jones Industrial Average enduring its worst week since the financial crisis, dropping nearly 7%. Similarly, the S&P 500 dropped about 5.6% over the week, hovering around 2,416.57 by Friday’s closing bell. Finally, the RISK OFF sentiment drove Treasury yields lower, with 10-year Treasuries falling about four basis points, ending the week around 2.787%.

Given the Christmas holiday and Boxing Day observed the day after, liquidity will be relatively light this week. Some key data releases will trickle in throughout the week, including housing data out of the U.S. and inflation reports released in Japan, Spain, and Germany (see more below).

I. U.S. Economic Data/Markets

Federal Reserve hikes rates by 25 basis points to 2.25-2.50%. Other key takeaways from the meeting included:
- Eleven of the 17 officials expected two rate hikes next year, compared to seven of 16 officials who held that view in September.
- An emphasis that the economy has been “rising at a strong rate” as unemployment remains low and household spending continues to remain strong.
- The monitoring of global economic and financial developments was incorporated in the FOMC statement.
- Slightly weaker GDP projections for 2018 and 2019 relative to forecasts provided at the September meeting.
- The unemployment rate is expected to slightly rise in 2020 and 2021.
- The market perceived the announcement less dovish than expected to prompt a selloff in equities, with the Dow Jones Industrial Average falling more than 500 points during Powell’s press conference. Ten-year Treasury yields also dropped, about five basis points to 2.782% on the back of the announcement.

GDP for the third quarter slightly disappointed coming in at 3.4% versus estimates of 3.5%.
- Consumer spending rose at a slightly slower rate and exports declined last quarter.
- A build-up in inventories largely contributed to the data.
- Headwinds to growth could include a slowdown within the housing sector and areas tied to manufacturing and trade.
Durable goods rose 0.8% in November m-o-m which was largely led by defense spending.
- Business spending declined 0.6%, its third drop in four months.
The core Personal Consumption Expenditures price index, the Fed’s preferred measure of inflation rose 1.9% in November y-o-y, in line with expectations.
U.S. inflation (as measured by the consumer price index) rose 2.2% in November, down from the rise of 2.5% in October.
- Core CPI (excluding food and energy increased 2.2% y-o-y.
- Higher healthcare costs, rising rents primarily drove the data.
Existing Home Sales surprised to the upside in November, rising 1.9%, versus expectations of a 0.6% decline.
- However, y-oy sales declined 7%, a 7.5 year low.
- Tight inventory and higher mortgage rates contributed to the data.

II. Other

Chinese officials announced more stimulus in 2019 after the annual Economic Work Conference.
- Tax cuts will be implemented, which should help incite demand and help the economy from any fallout from the trade war.
- Monetary policy will also be supportive in efforts to spur the economy.
- Government bond issuance is also expected to increase regarding infrastructure improvements.
- Economists expect China’s GDP to slow from 6.6% in 2018 to 6.2% in 2019.
UK Economic Data
- GDP increased 0.6% y-o-y, although business investment has fallen.
- November retail sales surprised to the upside rising 1.4% versus expectations of 0.3%.
  - Household good sales and online sales largely drove the data.
  - GBP rallied versus the USD on the back of the data and continued USD weakening on the back the FOMC announcement. After opening the week around 1.2588, the pair touched a high of 1.2703, but had traded back to 1.265 as of this writing.
Bank of England unanimously voted to keep its key rate unchanged at 0.75%.
- Uncertainty surrounding Brexit (which has “intensified considerably”), slowing global growth and in particular, a weaker Eurozone economy was among the bank’s concerns.
- U.K. business investment has fallen for the past three quarters and housing remains subdued, according to the bank.
- Falling oil prices have alleviated inflationary pressures and will likely bring inflation below its target of 2% in the near future.
- Revised down economic growth for the final quarter of 2018 from 0.3% to 0.2%.
Bank of Japan kept its short-term target rate unchanged at -0.1% and 10-year yield target near zero – as widely expected.
- Governor Kuroda noted risks to the Japanese economy stemming from outside its borders, including trade tensions, and volatile markets. Slowing global growth could also contribute to a weaker Japanese economic growth given it is largely driven by exports.
- Kuroda noted his readiness to ease policy if warranted via cutting interest rates or asset purchases to stimulate the economy.
- Japanese stock market took a hit on the back of the announcement with the Topix falling about 2.5%.
Eurozone CPI comes in lower-than-expected at 1.9% y-o-y versus estimates of 2.0%, although core CPI (excluding food and energy) came in line at 1.0%. October’s CPI reading.
- Headline inflation dropped from October’s reading of 2.2%.