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The Fed May Have More Reason to Go-Slow on Rate Hikes For the week of March 11, 2019

Key Market Data

03/01/2019 03/08/2019 One Week Change YTD One Year
S&P 500 Index 2,803.69 2,743.07 -2.16% +9.87% +2.15%
MSCI EAFE Index 1,878.53 1,839.23 -2.09% +7.57% -6.49%
Barclays Capital U.S. Aggregate Bond Index 2,063.07 2,077.11 +0.68% +1.49% +3.69%
10-year Treasury Note Rate 2.755% 2.630% -12.5 basis points -5.5 basis points -22.8 basis points

The stock market bull run hit its 10th anniversary on Saturday, but the celebration was somewhat muted as the major indexes were coming off their worst week since December thanks to some disappointing news from both home and abroad about the global economy, notably jobs in the United States, growth in the European Union, and exports from China.

On Friday, investors and analysts were caught off guard when the Labor Department announced that only 20,000 jobs had been created in February, well below the estimate of 180,000. However, there was plenty of good news in the report, including the fact that the household unemployment rate fell from January’s 4 percent to 3.8 percent. And, better yet, wages were up 3.4 percent from a year earlier, the best showing since April of 2009. The jobs shortfall may have been a correction of sorts after 311,000 jobs were added in January. The average for the last three months was a solid 186,000, not to mention the fact that just two days earlier ADP said that 183,000 private sector jobs had been added in January. In addition, the labor force participation rate was unchanged at 63.2 percent. Even so, the low total for February is likely to help the Federal Reserve build the case for its go-slow approach to raising the benchmark rate. On Thursday, before the report, Fed Governor Lael Brainard said that the outlook in the U.S. “appears to have softened against a backdrop of greater downside risks,” justifying what she called the Fed’s “watchful waiting” approach.

The ECB changes course

On Thursday, the European Central Bank, which ended its quantitative easing program in December and was expected to perhaps raise its rate this year, took a step backward. With a lower GDP growth forecast in 2019, the ECB said it was going to recommence its program of low-cost, long-term loans to banks to encourage lending and would leave its rate unchanged through 2019. At a press briefing, the ECB’s President Mario Draghi said he did not expect a recession but noted that “lower confidence produced by trade discussions” was a factor in the slowdown. He also said, “We are very open to act and determined to act when it’s needed.” Mr. Draghi is leaving office in October, and it’s now likely that there won’t have been a single rate hike during his term as president, which began in 2011. Also, on Thursday, the Organization for Economic Cooperation and Development lowered its estimate for global growth in 2019 to 1 percent from 1.8 percent.

China: stimulus, trade, a lawsuit, and exports

China was in the news last week on a number of fronts. At the annual National People’s Congress in Beijing, Premier Li Keqiang announced new stimulus steps that would be taken to boost China’s growth in what he called “this crucial year,” with the government now forecasting GDP for 2019 at 6 percent (this year will mark both the 70th anniversary of the founding of the People’s Republic of China and the 30th anniversary of the Tiananmen Square massacre). Meanwhile, the trade talks between China and the United States seem to have stalled somewhat. On Friday, President Trump said, “If this isn’t a great deal, we won’t make a deal,” and at the NPC, Commerce Minister Zhong Shan observed, “We still have a lot of work to do” before a deal is done. Tension between the two economic powers was ratcheted even higher last week when Huawei Technologies said it was suing the U.S. government – a step endorsed by China’s government – for what it called violations of the Constitution in its moves to stop the sale of Huawei’s products. The White House sees Huawei as a national security threat and has been pressing its allies to not use Huawei products as the company rolls out its 5G network. The week ended with China’s exports in February plummeting 20.7 percent from a year earlier in dollar terms, though early year numbers are often skewed by China’s extended New Year.

The trade gap

In the midst of trade negotiations with China, the U.S. government said that the trade deficit jumped 19 percent from November to $59.8 billion in December, a 10-year high. For 2018, the trade gap climbed 12 percent to $621 billion, the highest total since 2008, and the deficit with China hit a new high of $419 billion. The stronger dollar has played a role as American goods are more expensive, and the tax cuts are also seen as a factor as Americans have had more money to spend. White House Economic Advisor Kevin Hassett said that a wider gap is not unexpected when the U.S. is doing better than the rest of the world economically.

The deficit

For the first four months of the fiscal year, the federal deficit rose to $310 billion, up 77 percent from a year earlier because of higher spending and lower tax revenues. Keith Hall, the Director of the Congressional Budget Office, said, “It’s hard to imagine this is sustainable.” In other news, the Fed reported that household net worth fell 3.5 percent in the fourth quarter to $104.33 trillion, largely because of the stock market’s late-year retreat, the biggest quarterly drop on a percentage basis since 2008. Consumer borrowing hit a record when it rose by $17.05 billion in January from December, the Fed said, to a total of $4.03 trillion. The Fed’s Beige Book report said that the economy had been impacted by the federal government shutdown and 10 of the Fed’s 12 districts reported “slight-to-moderate” growth. The Institute for Supply Management’s nonmanufacturing index rose to an historically high 59.7 in February from 56.7 in January, while the new orders index hit a 13-year high of 65.2. Construction spending was off 0.6 percent in December from November. New home sales advanced 3.7 percent in December from November, a sign that lower mortgage rates may be helping sales. For all of 2018, sales were up 1.5 percent. Housing starts rose 18.6 percent in January from December, though they were down 7.8 percent from a year earlier. Building permits increased 1.4 percent in January from December. Nonfarm productivity came in at an annual rate of 1.9 percent in the fourth quarter and had the strongest last nine months of the year since 2010. And first-time jobless claims for the week ending March 2nd fell 3,000 to 223,000; the four-week moving average dipped 3,000 to 226,250.

A look ahead

This week’s releases will include updates on retail sales, business inventories, small business optimism, the consumer and producer price indexes, construction spending, new home sales and industrial production and capacity utilization.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.