It’s a grim week in global growth when the brighter take is that Italy’s more in stagnation than recession. Elsewhere, the tone is almost universally downbeat, with an OECD gauge affirming a deep sluggishness in the world’s major economies. Outside of sour trade data, China also saw its first car sales dip three decades, adding to a slowdown that has the government cutting taxes to nudge consumption. Germany barely dodged a recession at the end of 2018, and Mario Draghi sees the weakness across Europe even as he doesn’t want to apply the R-word. Economic policy uncertainty is at a record high globally, and the likes of Brexit and the U.S. government shutdown are adding dark clouds on the horizon. On a hopeful note, here’s a case for a pleasant surprise in the Philippines economy. And here’s a Bloomberg Economics analysis to help you read the tea leaves on global growth.
Esther George won the week for monetary policy doves, as the famously hawkish regional Fed chief called for patience on raising interest rates. That marked just the latest sign that 2019 will be a year of caution at central banks, outlined in our quarterly decision guide. China’s quietly cutting borrowing costs while holding rates. The Bank of Japan probably will cut its inflation forecast on cheaper oil, and here’s a guide to its language on the yen. Brexit chaos could delay action at the Bank of England, and markets already were coming around to a more dovish view there. Turkey, Indonesia and South Africa all kept rates on hold.
Housing Starts and Building Permit data postponed by Government Shutdown
Philly Fed Business Outlook (exp 9.5 v. 9.1% prior) 0730 hrs cst
Initial Jobless Claims (exp 220k v. 216k prior) 0730 hrs cst
Continuing Claims (exp 1734k v. 1722k prior) 0730 hrs cst
Fed Gov Quarles speaks at an Insurance Industry Forum 0945 hrs cst
4-week bill auction ($40b)
8-week bill auction ($30b)
“They have every justification if they wish to not proceed in lockstep with their earlier increases but rather take a pause, and wait and see. It would not necessarily signal an end to rate increases, it would simply be a pause to evaluate.”
The Federal Reserve has plenty of reasons to pause its interest-rate increases in March to take stock of the economy, according to former Federal Reserve Bank of Atlanta President Dennis Lockhart.
“Monetary policy is about the real economy, not the financial economy. So the FOMC will do what it thinks is best for Main Street,” he said. “From time to time that may seem out of alignment with what markets are signaling. That’s very much the case today.”
“It was like hitting the brakes when you’re going over the speed limit,” Redfin Chief Economist Daryl Fairweather said of the slowdown. “You can’t have prices growing faster than wages year after year.”
Home sales in the U.S. slumped in December, while prices inched up slightly, marking the smallest annual increase since the end of the last housing crash in 2012, according to data from brokerage Redfin.
The median home price rose to $289,800 in December, a gain of 1.2 percent, the slowest monthly pace since March 2012. Sales dropped by almost 11 percent, the biggest decline for any month since 2016, Redfin said. Previously hot metropolitan areas are cooling fast. Prices dropped 7.3 percent in San Jose, California.
The property market, which was surging for years as buyers fought for a limited supply of homes, is softening as inventories start to increase and buyers take more time. The jump in mortgage rates last year added to housing’s underlying affordability problem, putting an end to the era of rampant bidding wars.Click here to download a pdf of this article, Missile.pdf
“It’s still our view that we’re not headed for recession in any of the major economies,” Goldman’s Peter Oppenheimer told CNBC’s Annette Weisbach at the Goldman Sachs Global Strategy Conference in Frankfurt.
“At the end of last year, there was a particularly sharp downgrade in expectations for the U.S. and while there has been a big tightening of policy and financial conditions in the U.S. … We don’t see a recession, but we do see a pretty sharp slowdown,” he said, adding that markets had “got too far into pricing a deeper downturn than we expect.”
Oppenheimer’s comments come after general pessimism among market participants in the U.S. over where the market is heading amid rising interest rates from the U.S. Federal Reserve and geopolitical tensions, especially between the U.S. and China.
A survey of 500 U.S. institutional investors by Natixis in December showed that the majority felt that the longest bull market in history will come to an end in 2019. Forty-one percent of those surveyed said they would be reducing allocations to U.S. equities.
The growth outlook for 2019 is also beset with trade concerns, a slowdown in China, Brexit and political uncertainty in Europe making forecasts for the global economy tricky.
“The bad trade data will quite likely increase the pressure on China to achieve a deal, or at least a suspension of the U.S. tariff hikes,” said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong. “At the same time, the U.S. side also seems to be under more pressure to de-escalate tension in terms of news on the economy and financial markets than a few months ago.”
China’s exports slumped in December as a rush of orders to beat expected tariffs showed signs of fading and as domestic buyers succumbed to a worsening economic outlook.
The worse than expected figures, with exports falling 4.4 percent in December from a year earlier, set a grim domestic backdrop for China’s negotiators as they seek a deal to end the stand-off with the Trump administration. The fall in exports was the worst result since 2016 in dollar terms while imports slumped 7.6 percent, also the worst reading since 2016 and hinting at softening demand at home.Click here to download a pdf of this article, Missile.pdf
Analysts surveyed by Bloomberg over the past week see a median 25 percent chance of a slump in the next 12 months, up from 20 percent in the December survey. The Federal Reserve is now projected to keep interest rates steady in the first quarter, instead of raising them, before two increases total this year -- down from four moves in 2018.
The median projection for 2019 economic growth edged down to 2.5 percent following 2.9 percent in 2018 as the boost from fiscal stimulus fades. Growth is still expected to be buoyed by a strong jobs market, rising wages and some lingering effects of tax cuts. If the expansion that began in 2009 lasts until July, it would mark 10 years and become the country’s longest on record.
The People’s Bank of China is expected to continue to cut the amount of cash that banks must hold as reserves further in 2019 while keeping interbank borrowing costs largely steady even amid tightening U.S. Federal Reserve policy, according to a survey.
As part of efforts to shore up the slowing economy, the central bank will cut the required reserve ratio by another 150 basis points, in addition to the 100 basis point cut announced last week, according to a survey of 18 bond traders and analysts conducted between Dec. 24 and Jan. 9.
The PBOC will also likely tweak the cost of interbank lending slightly lower for the first time since 2015, taking the rate on 7-day reverse repurchase agreements to 2.45 percent by the end of 2019 from the current 2.55 percent, according to the median estimate in the survey.
The rate will be cut by 5 basis points in the second quarter and another 5 basis points in the third quarter, participants said.
The easing measures altogether will drive gains in government bonds, with the 10-year sovereign yield dropping to as low as 2.8 percent this year, compared with about 3.1 percent now, the survey showed.
“China will stick to the main theme of structural deleveraging, properly tackle local governments’ debt risks, and continue to clean up overcapacity, debts and zombie firms,” Yi said in the interview with state-run Xinhua News. Financial risks which were exposed have been tackled in an orderly manner, the overall leverage ratio remains stable and financial risks are generally contained, he said.
“We are going to accurately control overall liquidity,” Yi said in the interview. “While avoiding overly rapid liquidity contraction which would shake the real economy, we should as well stay away from the flood-like stimulus which would hamper structural deleveraging.”
The Chinese central bank will start lending money to banks under a new policy instrument in late January, the governor announced in an interview, promising that China will avoid both massive stimulus and a fast credit contraction.
The targeted Medium Term Lending Facility, which lends cash for up to three years, was announced in December and will encourage banks to lend to small and private companies which are facing credit shortages due to a government debt crackdown. China is trying to balance funneling more cash to the real economy without hampering its campaign to clean up excess debt and financial risk.Click here to download a pdf of this article, Missile.pdf
Job openings are outnumbering unemployed workers across increasingly wide swaths of the United States, forcing businesses to rethink how they find workers, which could keep pressure on the Federal Reserve to raise interest rates despite a global economic slowdown.
The volume of openings first topped the number of jobless people in Midwestern states in early 2017. But in recent months that phenomenon has spread to other regions, particularly the South.
Economists say the most convincing signs of labor shortages would be a surge in wage growth. While average hourly earnings rose 3.2 percent in December that is tepid by historical standards.
It is possible that the imbalance between job openings and unemployed workers owes partly to the ease with which online job advertisements can be posted. Additionally, it may overstate labor market tightness because people not actively looking for work are not counted in the ranks of the unemployed.Click here to download a pdf of this article, Missile.pdf
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