by Alfstad Capital
Jan. 9: In the past 48 hours, we’ve heard from Federal Open Market Committee members Raphael Bostic of Atlanta, Charles L. Evans of Chicago, and James Bullard of St Louis, and their comments are very much in alignment with the Powell Pivot.
Yesterday, Bostic suggested that, in his mind, what we probably need is just one more interest-rate hike this year to complete the Fed’s task of policy normalization.
Bullard this morning voiced his fears that any more rate hikes in 2019 could prove to be too much and push the U.S. economy into an unwanted recession.
Evans voiced a high degree of comfort within the FOMC for being patient, very patient if necessary, and letting the data lead policy in the direction that is needed. Keep in mind that of these three Fedsters, Evans has by far has been the most strident hawk, so his shift to neutrality and patience is a really big move.
So even if the FOMC has started to sing a new tune, it has yet to act any differently, and, in particular, it has done nothing to halt the drainage of liquidity, and quantitative tightening, still running at approximately $50 billion a month. Think of this QT as stealth tightening of somewhere in the realm of 100 to as much as 200 basis points.
Gloom and Doom in 2019, Plus Above-Trend Growth
by Regions Financial
Jan. 7: Wow, where are those “gloom, despair, and agony” guys when you really need them? Probably just as well they’re not around; really, if they were around, they wouldn’t have time to be singing us a song about how bad things are, as they’d be too busy selling every asset they own, packing up their cash and all the canned goods they could carry, and heading for the hills. You know, kind of like what everyone who is still around is doing. OK, that may be a bit of an exaggeration, but it doesn’t feel like too much of an exaggeration, given the dour tone of the equity markets over the past two months, increasing talk of recession, and what has been a rising volume of noise on the political front, both at home and abroad.
Still, while it does seem that the downside risks are intensifying, we continue to expect the current expansion to endure at least into 2020. In our full report, we discuss some of the main elements of our baseline 2019 forecast in a series of questions. Here’s just one of them:
Question No. 1: Real GDP growth—over or under our estimate? We say over, and look for real GDP growth of 2.6% in 2019. Last year, we set the bar for real GDP growth at 3%, and we took the under, with our forecast calling 2.8% growth. While we won’t have the initial fourth-quarter 2018 data until later this month, fourth-quarter real GDP growth is tracking right around 3%, which would put full-year 2018 real GDP growth at 2.9%, just a notch above our forecast. We did think the 2017 tax bill would boost growth in 2018, but our expectations were a bit more restrained than those of many others who felt 3% growth would be an easy bar to clear. While we were close on top-line growth in 2018, the mix of growth was a bit different from what our forecast anticipated. Relative to what we anticipated, consumer spending, business investment, and government spending were a bit stronger, while residential investment was weaker.
While we thought expectations for 2018 were too lofty, we think expectations for 2019 are too low—and seemingly sinking by the second. We set the bar for 2019 real GDP growth at 2.25% for a specific reason. If 2018 growth does come in at 2.9%, that would put average annual real GDP growth over the life of this expansion at…wait for the drum roll…2.25%. So, in that sense, we think that real GDP growth will be above- average in 2019. Also, 2.25% is above the economy’s “speed limit,” the rate of growth that can be sustained over time without sparking inflation pressures, which at present we peg at right around 2%. In other words, 2019 should prove to be another year of solid growth for the U.S. economy.
Our answers will lay down markers for how we expect 2019 to turn out, and as we go. we’ll look back to our answers for 2018 and see how our calls turned out. As always, we reserve the right to be wrong, and if history is any guide, we’ll exercise that right to the fullest extent of the law.
–Richard F. Moody
Canadian Oil Prices Reclaim Rightful Stake
A.M. Market Charts
by BMO Financial
Jan. 9: Less than three months ago, the grotesquely large spread between benchmark U.S. oil prices and Western Canada Select, or WCS, was at record levels of almost $50 per barrel and was widely seen as the single biggest threat to the Canadian economic outlook. Presto, change-o, and suddenly the spread is probing its tightest level in years (the gap was at just $9 on Tuesday, Jan. 8.).
The swift turn is due to a few factors, but the announced mandated production cuts in Alberta are right at the top of the heap. While this swift reversal is no doubt welcome news to most, the other side of the coin is that West Texas Intermediate, or WTI, prices are down a lot. Even with a recent recovery, they are still down $15 from last year’s average.
So, the level of WCS prices at just over $40 is actually quite close to the average for most of 2017 and 2018 combined. On balance, oil prices overall are now probably seen as only a small drag on the growth outlook for 2019. But, that’s a better place than just a month ago.
Hopeful, Doable 2019 Plans
The View From Here
by Northern Trust
Jan. 9:As we separate noise from signal, we arrive at the conclusion that 2019 should be a successful year for the global economy. Growth may not match last year’s, but that is to be expected; the effects of U.S. tax reform are fading, and the impact of trade restrictions is rising. To achieve a favorable outcome, tension surrounding four situations will have to de-escalate
East-West Trade: We expect that both China and the U.S. will retreat from their harsh rhetoric and find ways forward. China is anxious to avoid further economic deterioration and credit stress; the U.S. administration is seeking to avoid further market upset.
Brexit: A disorderly “no deal” separation has been rising in likelihood, but our most likely case is an extension of current deadlines. An agreement leaving current patterns of commerce and finance largely in place should follow.
Political Dissonance: An opposition House has been seated in Washington, and European parliamentary elections may find extreme parties making gains. Markets have handled populism in stride up to this point, but may soon find their patience challenged.
Monetary Policy Misgivings: The world’s central banks are, rightfully, becoming less accommodative. Some see a disconnect between the market’s expectations and those of the U.S. Federal Reserve, the European Central Bank, and the Bank of England. Furthermore, stress between government monetary authorities is rising. Care must be taken to reach sound decisions on policy, and to communicate them effectively.
–Carl R. Tannenbaum
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