The US Treasury market appeared to be more interested in the political ‘goings on’ in the UK rather than the domestic landscape yesterday, indicating that we may be at yield levels fairly priced for the current time. Although we now believe the Fed has moved off their pre-destined path to a higher funds rate; now heavily data dependent, one-month data will not be of a major focus, rather trends in the path of the data, thus the yield curve also awaits further evidence.
432 to 202! We doubt any of our readers require the context of this result but perhaps the below offers some complementary speculation on the challenges ahead for Brexit following yesterday’s vote.
There are only 72 days until the current Article 50 March 29th deadline is reached; but those that follow communications from the European Commission will know that their contingency plan clearly states that parties must “Submit all necessary draft implementing acts for a vote in the competent committees by 15 February 2019 at the latest.”
As Sir David Attenborough has stated, “We have to act. We have to act now to try and clear up some of the appalling damage we have made to the ocean … and that is going to require positive action”.
Since plastic was introduced in the 1950’s eight point three billion metric tons of plastic has been produced and every year 8 million metric tons of plastic end up in our oceans. By 2050, 100 hundred years since it was first introduced, plastic items in the ocean will outweigh and outnumber fish.
Interesting article in the Wall Street Journal last week about birth rates in the US. It’s not a new discovery that not only the US but globally developed countries are struggling with declining birth-rates (if you want the SSC take on global demographics, we wrote a piece last year that we can send you) however the data was stark. For a country’s population to maintain the status quo with regards birth rates, researchers believe there should be 2,100 babies born for every 1,000 women over their lifetime.
Earlier this week, Saudi Arabia raised USD7.5bn with a dual tranche dollar denominated debt issue that attracted USD27bn in orders, despite international outcry in Q4’18 over the killing of the journalist Jamal Khashoggi. Seemingly, in the absence of punitive sanctions and with the prospect of greater index inclusion Saudi Arabia still remains on investor radar screens.
Yesterday in the minutes released from the FOMC for the December meeting, when the Fed hiked its benchmark by 25 basis points, the Federal Reserve formally acknowledged that the policy path for rates was ‘less clear’. The minutes also note that in the current low-inflationary environment, the Fed can ‘afford to be patient about further policy firming’ adding that ‘If incoming information prompted meaningful reassessments of the economic outlook and attendant risks, either to the upside or the downside, their policy outlook would change’.
With the China-US talks extending into their third day, European and Asian markets welcomed the demonstration of commitment by both sides and were further upbeat today with news that the trade talks concluded on an “optimistic note”. The CSI 300 and Hang Seng were both up 2% earlier this morning, but Chinese state media has quotes from persons inside the foreign ministry stating the US did not immediately confirm any agreement. An official announcement of the outcome is expected from Chinese media later today.
The next Fed meeting is scheduled for the 31st January but before that, tomorrow we have the minutes from their last get together in December. Market focus will be on the likelihood of the Fed taking a pause to reassess now they have rates at levels that could represent a neutral level.
Last Friday Fed Chair Powell was speaking in Atlanta just after the higher than expected Non-Farm Payrolls report. He said that there was no pre-set path for monetary policy and the Fed will be ‘patient’. On the NFP report, he welcomed the wage inflation number but added that it did not raise concerns for inflation.
On Friday China again cut banks reserve requirement ratios (RRR) by 100 basis points as it looks to soften the risk of a sharp slowdown. Although this was the first for 2019, the PBoC had already cut the RRR 4 times in 2018 as it battles with lower growth and mounting pressure from the US over tariffs. As it stands at the moment RRR for large banks is 14.5% with small banks at 12.5%. The reduced ratio will be made in 2 stages according to the PBoC, the first on 15th January, the second 10 days later, both in 2 equal amounts. The PBoC believes the cut will release over USD116bn into the financial system, plus ensuring an ample supply of cash ahead of the Spring Festival holidays.
Here we are with the last Daily note of 2018.
The Fed as widely expected raised rates again last night taking the lower funds rate to 2.25% from 2%. Although Fed Chair Powell remained upbeat regarding the economic outlook, the Fed’s so called ‘Dot Plot’ of future hikes was revised down so that each of the expected year end rates in the 3 year forecast came down by one full hike. They also changed the wording in their post meeting statement by adding the word ‘some’ to now read ‘Some further gradual increases in the target range for the Federal funds rate’.
With one eye on the Fed tonight, one eye on the markets, we need to keep our other eye on congress. So being a cyclops may get you a part in the remake of ‘The seventh voyage of Sinbad’ but is of no use when investing at this time of year.
Congress are at loggerheads once more regarding a US budget with a partial government shutdown, if no agreement is forthcoming, starting as soon as this Friday at midnight.
US stocks fell to a 14 month low yesterday with the Japanese Topix also now at an 18 month low. Also US small-caps became the latest sector to enter technical bear market territory joining the troubled German Dax amongst others. The S&P 500 last week had already wiped out year-to-date returns. Adding to yesterday’s -2% drop, and global markets also pointing to further declines today, it looks increasingly certain that, what started out as a booming year, 2018 will end in the red across a vast majority of global stock and bond indexes.
Tomorrow will see the Chinese President Xi deliver a speech commemorating 40 years of China’s ‘reform and opening’. The speech is being eagerly anticipated due to the recent developments within China and the external pressure that has been exerted, especially by the Trump administration. Both of these headwinds may force Xi to change course on both the substance and direction of macro policy reform going forward.
Amidst signs of slowing global growth momentum the Fed has emphasized a more flexible approach to policy tightening. Although the ECB is only looking to begin reducing stimulus, it looks to be taking a similar tack already as it is faced with a delicate balancing act of reducing accommodation at a time when Eurozone growth has been slowing. Draghi acknowledged as much saying risk was a focal point of discussion and he’d summarise the assessment as ‘continuing confidence with increasing caution’.
Yesterday the UK Conservative party had its very own remain/leave vote of confidence in Theresa May, this time voting for their leader to remain by a margin of 200 to 117. However Theresa May later announced she would leave (before the next general election that is). As you can imagine, the tabloid headline writers had a field day, particular highlights being ‘Time to call it a May’ and ‘It’s lame duck for Christmas’.
Prime Minister Theresa May will face a vote of no confidence this evening, now more than 48 Conservative MPs (i.e. more than the required 15%) petitioned for such to the 1922 Committee. It seems the ‘backbench drivers’ are now reaching for the wheel after May took one too many wrong turns, postponing the futile Parliamentary Brexit vote earlier this week. This frustrated move to vote seemed almost inevitable but the success of it is far from certain; the 48 dissenters will need at least another 110 Conservative MPs to vote alongside them to reach the required simple majority.
In one of his last interviews before he retires from the International Monetary Fund (IMF), its chief economist has warned that the US may start to feel the effects of a sharp slowdown over the next couple of years, although he does not believe that it will result in a recession. Dr Maurice Obstfeld, speaking to the Financial Times and The Wall Street Journal said ‘We've long been predicting somewhat lower US growth for 2019 than what we are seeing this year’ adding the slowdown ‘is going to be sharper probably in 2020 than in 2019, according to the data we are seeing’. The warning comes after the IMF had already downgraded its prediction for US growth form 2.8% this year to 2.5% in 2019.
The last two Fed speakers on Friday before the blackout period ahead of the Fed’s meeting next week were Bullard, a non-voter, and voting Governor Brainard. Bullard, a dove, who has been constant in calling for restraint in rate hikes said he sees ‘no purpose in inverting the yield curve to try to be pre-emptive on inflation’. Brainard noted ‘that some tailwinds to the US economic outlook are fading’, though flagged that the labour market remains strong.
Tonight at midnight the Feds blackout period begins ahead of the 18th/19th December meeting. Interesting that the probability of a hike at that meeting fell to below 70% yesterday when just three weeks ago the market had a 95% take on a hike. Fed Governor Lael Brainard is the last scheduled Fed speaker before the blackout tonight in Washington.
Yesterday we heard from the Atlanta Fed president Bostic a voting member of the board who thinks the Fed should be taking a more neutral position.
The European Union yesterday unveiled plans to challenge the US dollar’s dependence in global markets by strengthening the international role of the Euro, with the longer term view of ‘de-dollarising’ the world economy. At the launch, Pierre Moscovici, the EU economic affairs commissioner believed ‘A wider use of the euro in the global economy yields important potential for better protecting European citizens and companies against external shocks and making the international finance and monetary system more resilient’.