All I want for Christmas
US Federal Reserve Chair Jay Powell all but dressed up in a Santa suit when he spoke at the New York Economic Club last week.
It’s been a rough couple of months, with the S&P 500 down 6% in dollar terms and credit spreads blowing out. At their highest, five-year high-yield spreads shot up to about 420bps, while investment grade spiked higher too. Ever since early October when Mr Powell said that US interest rates, at 2.25%, were “a long way” from neutral, investors have become worried about virtually everything. Rates were going to 4%, the US housing market was about to crash, China was approaching a hard landing, heavily indebted companies were crumbling and earnings growth was going to vanish completely in 2019, leaving only recession and sadness.
And so, Mr Powell walked to the podium in Manhattan on Wednesday and walked back his earlier comments. Now interest rates were just “just below the broad range” of neutral, which the Fed estimates is 2.50% to 3.50%. Of course, both of his statements were true – they just accentuate different things. Rates at 2.25% are slightly below the 2.50% lower end of the range, but they are also a good three hikes away from the mid-point of that range. And you thought markets are rational …
Semantics or not, investors decided that Mr Powell’s Fed committee is going to tone down the number of interest rate rises next year, leading the S&P 500 to shoot up 4.9% in dollar terms over the week. Markets now expect a December rate hike will be followed by just one or two 25bps moves in 2019. Concerns of a monetary policy mistake started to melt away. All that was left between investors and a true Santa rally was some good news from the Sino-American trade talks. And so it was: at the weekend presidents Donald Trump and Xi Jinping agreed to put further tariffs on ice for three months and China will reportedly phase out 40% tariffs on US-made cars. In response, the Shanghai Stock Exchange Index shot up more than 2.6% on Monday. That wave flowed through Europe and to the UK as the morning sun raced west; the FTSE 100 was up 2.3% in early trading. As long as the dialogue stays cordial stocks could skip merrily into the holiday season. Any more bad news could puncture this more optimistic mood, however.
The global economy is slowing down, but that doesn’t mean it’s going to slide quickly into recession. There have been several temporary decelerations over the past decade that were followed by re-accelerations. That’s typical of economies. That’s not to say there aren’t other problems out there, but we think markets had gotten very cagey without much reason. US PMIs and ISM surveys are coming out once the American market opens on Monday. They should give a bit more of an indication of how businesses feel in the world’s largest economy. Also, on Wednesday the US market will be closed to honour George H W Bush, who died on Friday aged 94.
Source: FE Analytics, data sterling total return to 30 November
Prime Minister Theresa May returns from the G-20 meeting in Argentina to the maelstrom of Brexit. The opposition is pressing hard for the government to release the legal briefing given by attorney-general Geoffrey Cox. Apparently, under the current draft the customs union backstop for Northern Ireland cannot be unilaterally dissolved. In other words, the UK can only withdraw from the arrangement with the EU’s consent. And the backstop will only end once the EU and UK have agreed on the terms of Britain’s exit. That could mean the UK is heading into a hall of mirrors with the door locked behind it.
With just a week to go before Parliament votes for the first time on Mrs May’s draft deal, the last chance saloon is opening for business. Labour has declared that it will call a vote of no confidence in the government should Mrs May fail to get her deal over the line on 11 December. Meanwhile, the government whips will be working furiously to ensure Conservative MPs fall into line. The Bank of England and other economists, public and private, have lined up to forecast how much the deal will impact the wealth of our nation, along with the even steeper price if we crash out without a deal.
It’s been de rigueur to pan the Bank’s estimations of the effects of the Brexit vote; however, we believe it has actually been more accurate over a medium-term time frame than many realise. When making its predictions in August 2016, the Bank believed that UK GDP would virtually flat line for a year before re-accelerating. What happened was growth accelerated rapidly soon after the vote, spurred on by buoyant consumers who shed their savings aggressively and then it slowed. The long and short of it: 27 months on from the referendum, UK GDP is smack bang where the Bank said it would be.
It would be dangerous to dismiss the economic forecasts given for the options as unreliable at best and fabrications at worst. Forecasts are a difficult job and they are often wrong in the short term. However, over a longer time frame they can illuminate the trade-offs of policy choices. Now is not the time for winging it, and people should know the price of what they’re buying before they have to pay it.
UK 10-Year yield @ 1.36%
US 10-Year yield @ 2.99%
Germany 10-Year yield @ 0.31%
Italy 10-Year yield @ 3.21%
Spain 10-Year yield @ 1.50%
Economic data and companies reporting for week commencing 3 December
Monday 3 December
UK: Manufacturing PMI
US: Wards Total Vehicle Sales, Manufacturing PMI, Construction Spending, ISM Manufacturing
EU: Manufacturing PMI; FRA: Manufacturing PMI; GER: Manufacturing PMI; ITA: Manufacturing PMI
Trading update: McColl’s Retail Group
Tuesday 4 December
UK: BRC Sales Like-For-Like, BoE’s Mark Carney speaks to Parliament, Construction PMI
EU: Producer Price Index
Final results: Greencore Group, ITE Group, Victrex
Interim results: Consort Medical, Discoverie group, Northgate, Park Group
Quarterly result: Ferguson
Trading update: IG Group
Wednesday 5 December
UK: New Car Registrations, Official Reserves, Services PMI
US: MBA Mortgage Applications, ADP Employment Change, Nonfarm Productivity, Unit Labor Costs, Services PMI, ISM Non-Manufacturing/Services; Fed’s Kay Powell speaks to Congress, Fed Beige Book
EU: Services PMI; FRA: Services PMI; GER: Services PMI; ITA: Services PMI
Final results: Majedie Investments, Numis Corporation, PCF Group, Stock Spirits Group
Interim results: Stagecoach Group, Tricorn Group
Trading update: Joules Group
Thursday 6 December
US: Challenger Job Cuts, Trade Balance, Initial Jobless Claims, Continuing Claims, Factory Orders, Durable Goods Orders, Capital Goods Orders, Household Net Worth Change (Q3), EIA Natural Gas Storage Change
EU: GER: Factory Orders, Construction PMI
Interim results: Smith (DS)
Trading update: Contour Global, Ted Baker
Friday 7 December
UK: CBI Trends Surveys, Halifax House Prices, BoE/TNS Inflation Next 12 Months
US: Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings, Consumer Credit, Wholesale Inventories and Trade Sales, University of Michigan Sentiment Survey
EU: GDP (Q3), Household Consumption, Government Expenditure, Gross Fixed Capital, Labour Costs; GER: Industrial Production
Interim results: Berkeley Group Holdings
Trading update: James Halstead, S&U