Federal Reserve Chairman Powell’s bullish stance on the economy at the post FOMC meeting press conference took the spotlight last week. Powell noted the robust economy with recent fiscal cuts serving as a boost and expects unemployment to remain low. This sentiment echoed in the committee’s forecasts for growth, which was reflected a nudge higher by year-end to 3.1% relative to June and March forecasts of 2.8% and 2.7% respectively. Moreover, as widely anticipated, the Fed raised rates another 25 basis points at its meeting bringing the Fed funds rate to range between 2% and 2.25%.
As this week kicks off the final quarter of the calendar year, market practitioners have much to juggle before year end. The Federal Reserve will more than likely hike rates again in December. Higher U.S. interest rates, tighter liquidity, and thereby a higher U.S. dollar and increasing oil prices will hover over the global economy while emerging markets try to remain afloat as geopolitical risks and current account deficits linger. Messy politics and concerns regarding burgeoning debt also extend beyond EM to developed economies such as Italy (more below).
Trade tensions remain on the forefront as the levies already imposed impact economies worldwide. The World Trade Organization (“WTO”) cut growth forecasts last week. Similarly, German institutions cut their outlook for 2018 growth citing protectionism and uncertainty surrounding a trade resolve (see below). Further, questions surrounding Brexit negotiations remain.
The impact of tariffs, trade rhetoric, and a stronger USD on U.S. corporates will be closely monitored as third-quarter earnings announcements trickle throughout the next two months. Nearly 80% of the 98 corporates that provided forecasts have indicated negative guidance, which is above the five-year average, according to FactSet. As for the previous quarter, the S&P 500 has enjoyed relatively high valuations and just closed out its best quarter in five years.
Finally, oil’s ascent will be worth watching as well. Last week, the commodity’s price hit four-year highs on the back of looming Iran sanctions, tighter supply, and with the Organization of the Petroleum Exporting Countries not providing any firm commitments. Some market gurus predict crude could reach $100 in the coming months. Brent crude hovered around $82.72 on Friday, gaining nearly 4% for the quarter and over 20% for the year.
I. U.S. Economic Data/Markets
- Inflation measure remains the Fed’s target.
- The Fed’s preferred inflation gauge, the core personal income and consumption expenditures rose 2% from a year ago.
- The core PCE was flat from July to August.
- Trade Deficit widened to the highest level seen in six months, the goods deficit reached a seasonally adjusted $75.8 billion.
- Attributing to the decline included exports of food, autos, and industrial supplies.
- The data perhaps foreshadows slowing growth in the third quarter, particularly as trade tensions do not seem to be abating.
- Consumer Confidence near two-decade high.
- The Conference Board reported that its measure of consumer confidence rose to 138.4, up from 134.7 last month.
- September’s reading is the highest level since September 2000.
- New Home Sales rebounded last month after two consecutive months of declines.
- August sales increased were about 629k, July’s figures were revised down to 608k from 627k.
- The market has tepid expectations for the trend going forward given the backdrop of a rising rate environment that would pressure mortgage rates upwards.
- U.S. GDP rose 4.2% in the second quarter, unrevised from a previous estimate. Consumer spending, exports and government spending attributed to the number.
- Federal Reserve Hikes Key Rate to range between 2% and 2.25% – it is the first time the rate is above 2% since the financial crisis. Key takeaways from the meeting and post-press conference included:
- This is the first time the key rate is also above inflation rates in about a decade.
- Fed removed “accommodative” from their statement, signaling that they are prepared to press ahead with rate hikes as needed.
- Twelve of the 16 officials expected another rate hike this year, up from eight of 15 in June.
- Three rate hikes are expected in 2019 and one more in 2020.
- The unemployment rate is expected a notch higher by year end at 3.7% compared to a forecast of 3.6% in June.
- U.S. stocks round out the best quarter in five years with the S&P rising 7.2% in the quarter and the health care sector leading the rally.
- Financials, however, have taken hits, particularly the banking sector as the Fed raises rates and the yield curve remains flat hurting the bottom line. Uncertainties regarding trade wars may hinder loan demand and create general economic weakness tied to banking. Pressure on the sector is expected to remain.
II. Trade Talk
- Japan embraced trade negotiations with the U.S. calling for a new framework, Trade Agreement on Goods (“TAG”), which would include certain services as well.
- The framework will likely target shielding the auto sector from tariffs as it plays a large role for the Japanese economy.
- Conversely, the U.S. will likely push against agricultural duties imposed on Japanese imports.
- Nafta 2.0: The U.S. and Canada reached a last-minute deal late Sunday night paving the way for the tri party agreement to be “fast-tracked” to the Senate.
- Officials within the Trump Administration said earlier in the week that the U.S. would be willing to move ahead with a new NAFTA agreement without Canada.
- While details of the agreement between the U.S. and Mexico are expected to be released, Mexico’s incoming prime minister noted his willingness to push for a trilateral agreement and include Canada.
III. Other
- Oil reached four-year highs.
- Brent crude peaked to $82.87, a level not seen since November 2014.
- Earlier in the year, the Trump Administration noted that any country that imports oil from Iran after November could face sanctions from the U.S.
- The U.S. could release some of its petroleum reserves, which could boost global supplies.
- German market practitioners cut 2018 growth forecasts to 1.7% from 2.2% and lowered predictions for 2019 to 1.9% from 2%.
- Rising trade conflicts, labor shortage, weak export demand, ballooning Italian debt and ongoing Brexit negotiations were all attributed to the cut in forecasts, according to the report.
- World Trade Organizations lowered 2018 growth estimates to 3.9% down from a forecast of 4.4% in April, citing rising trade tensions for the change.
- 4.7% growth was recorded in 2017.
- The Italian government released a wider-than-expected budget deficit, which prompted a selloff in Italian government bonds sending yields to four-month highs. Ten-year Italian yield jumped to 3.14% from 2.89% on the back of the announcement.
- Careful attention will be paid to how the rating agencies perceive the 2.4% deficit budget projection.
- The Euro and Italian equities took a hit on the back of the news.
- The Reserve Bank of India is largely expected to hike rates by 25 basis points to 6.75% at its October 5th meeting.
- Analysts changed their view from the bank remaining on hold until next year to a hike next week, given the rupee’s tumultuous run. The currency has depreciated about 15% against the USD since the beginning of the year.
This week: The market will largely pay attention to manufacturing data to be released globally on the back of escalating trade tensions. The Australian central bank will release its rate decision, which is widely expected to remain unchanged. A key focus will be towards the end of the week when September U.S. unemployment data will be released. In particular, market practitioners will pay attention to any pressure on wages as a sign of increased inflation.
Key data/events include:
- EUR/GBP/German/Canada Markit manufacturing PMI (Monday)
- U.S. ISM Manufacturing PMI
- U.S. ISM Prices Paid
- AUD central bank rate decision (Tuesday)
- GBP PMI construction
- FOMC Official Quarles speaks
- AUD building permits(Wednesday)
- U.K. PM Theresa May speaks
- EUR/GBP/German/Spain Markit Services PMI
- U.S. ISM non-manufacturing PMI
- U.S. Markit PMI composite
- U.S. ADP unemployment change
- JPY foreign bond/stock investments
- AUD trade data (Thursday)
- U.S. factory orders
- CAD Ivey Purchasing Managers Index
- JPY overall household spending
- AUD retail sales (Friday)
- Swiss CPI
- U.S. September unemployment data
- U.S. trade balance
- CAD unemployment data
- U.S. Baker Hughes U.S. oil rig count
- U.S. consumer credit change
