Bad data says, “Can’t you hear me knockin’?”, but global equities don’t listen

Brian Nick

The last week’s market highlights:

Quote of the week:

“If you’re in a card game and you can’t figure out who the patsy is, you’re it.” – Warren Buffett
Each week, we present our featured topics in the context of the major themes listed below from Nuveens 2019 Outlook :
  • U.S. economy: A slowdown, not a recession
  • Global economy: Amid lower expectations, emerging markets could surprise to the upside
  • Policy watch: Fewer tailwinds, stronger headwinds
  • Fixed income: Rates likelier to rise than fall  
  • Equities: Late cycle but good value
  • Asset allocation: A neutral stock-bond view

U.S. economy: Data goes down, way down, and up

After hitting an all-time high in August 2018, the NFIB Small Business Optimism Index has fallen for five straight months, to its lowest level in more than two years. Survey respondents expressed concerns about gridlock in Washington following the 35-day government shutdown and over economic slowdowns in Europe and China. Compared to December, fewer small-business owners think now is a good time to expand, expect the U.S. economy to improve, or plan to hire.
One potentially mitigating factor about January’s NFIB report is that 97% of the survey respondents have fewer than 50 employees. Consequently, the overall data tends to be volatile, whipsawing much like consumer confidence often does. With President Trump signing a bill averting a second shutdown, we wouldn’t be surprised to see a rebound in February’s reading.
Other gauges of “soft,” or sentiment-based, data, such as The Conference Board’s consumer confidence index, have also been falling over the past few months. Against this backdrop, it’s natural to think that the U.S. is not only in the late stages of the current business cycle, but also that the end of the cycle is imminent.
This notion was reinforced on February 14, when the recently reopened U.S. Census Bureau reported a 1.2% plunge in December retail sales—the worst showing since September 2009. The retail sales control group, which is used to calculate GDP, fell an even-steeper 1.7%. (This group excludes sales of automobiles, gasoline, and construction materials.) As a result, we think fourth-quarter GDP growth may not reach 2%; not long ago, 3% was in play. Similarly, the Atlanta Fed’s GDPNow model anticipates expansion of just 1.5% in the fourth quarter, half of its mid-December forecast. For 2018 as a whole, we believe GDP growth may have fallen just short of 3% GDP growth, a rate at which the U.S. hasn’t grown in a calendar year since 2005.
December’s shockingly bad retail sales performance quickly generated headlines warning of an oncoming U.S. recession. We’re not ready to call for one yet, though. Consumer behavior may rebound in a hurry, or the December data may be revised sharply higher. After all, weekly same-store sales rose steadily in December to a record peak by Christmas. Moreover, a decline of this magnitude doesn’t square with merely modest drops in consumer confidence.   
Fortunately, most other “hard” data—including consumer spending and wages—has remained solid. Last week’s good news came in the form of December’s JOLTS report. The number of job openings reached 7.3 million at the end of 2018, the highest level since the Labor Department started measuring them in 2000. Because job openings are considered a leading indicator, this report suggests the U.S. employment engine could continue to steam ahead.

Eurozone economy: Well, at least there’s no recession in Germany  

Data watchers hoping for better European economic news were disappointed last week. Germany, the eurozone’s largest economy, registered 0% fourth-quarter GDP growth, technically keeping it out of recession territory by the narrowest of margins. (A recession is generally defined as two consecutive quarters of contraction.) The German economy shrank 0.2% in the previous three-month period.
In another downbeat data release, eurozone industrial production (IP) fell in December for the second straight month and fifth of the last seven. Manufacturers continued to feel the squeeze of softening global demand and heightened political uncertainty, especially amid ongoing Brexit drama in the U.K. Of some consolation: Part of December’s IP downturn can be attributed to new regulations affecting Germany’s automotive industry and not to a cyclical slowdown in that sector.
We do see some reassuring signals in the eurozone job market. Unemployment in the region sits at 7.9%, the lowest level in over a decade. In addition, there’s been a drop in the percentages of people working part-time because they can’t find full-time employment and who are too discouraged to keep looking for a job. With slack in the job market slowly being absorbed, wage growth should maintain the upward trajectory it’s been on for three consecutive quarters. Combined with low inflation, largely due to falling oil prices, disposable income is poised to perk up.
Given the eurozone’s struggles, the market-based odds of the European Central Bank (ECB) raising interest rates by the end of 2019 have dropped considerably, from 91% as of last September to just 39% on February 14. We don’t expect the ECB to tighten policy this year, even if wage growth persists.
When all’s said and done, the region may need a few more quarters to reaccelerate, especially if Brexit and the U.S.-China trade dispute continue to take a toll on business confidence. Barring a worse-than-anticipated outcome to one or both of those events, evidence of a pickup in eurozone economic activity could emerge in the second half of this year.  
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen LLC, its affiliates or other Nuveen staff.
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