Clarity meets confusion amid Brexit and U.S./China trade news     

Brian Nick

The last week’s market highlights:

Quote of the week:

“What’s the subject of life? To get rich? All those fellows out there getting rich could be dancing around the real subject of life.” – Paul Volcker
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 4Q 2019 Outlook :
  • U.S. economy: Still seeing signs of growth
  • Global economy: Downward pressure but no recession.    
  • Policy watch: Markets expect more easing  
  • Fixed income: Opt for high quality, longer maturity  
  • Equities: Get defensive, stay invested  
  • Asset allocation: While cautious, still prefer emerging-market bonds    

Policy watch: Central banks hold the line 

The Federal Reserve (Fed) offered no surprises at its final meeting of the year, held on December 11. After reducing interest rates three times in 2019, the Fed maintained the target range for the federal funds rate at 1.50%-1.75%. 
In its policy statement, the Fed removed a reference to “uncertainties” in its economic outlook, stating, rather, that monetary policy is “appropriate to sustain the current expansion.” This language indicates the Fed is less likely to ease policy than it was a few months ago. 
No member of the Federal Open Market Committee—the group within the Fed that sets monetary policy—anticipates cutting rates in 2020, while a large majority expects to remain on hold. Beyond next year, a majority believes the Fed will eventually raise rates as inflation climbs to or above the Fed’s 2% target.
Regarding external policy risks, the Fed met before knowing the outcome of last week’s U.K. election or its potential impact on the final timing and nature of Brexit. Similarly, at the time of the meeting it was still unclear whether the next round of U.S. tariffs on Chinese imports would take effect as scheduled on December 15. But those risks now pose less of a threat following Boris Johnson’s resounding win and reports of a “phase-one” trade deal.  If they re-escalate, however, the Fed could feel compelled to cut again.
The day after the Fed meeting, the European Central Bank (ECB) gathered for the first time under new president Christine Lagarde. As expected, the ECB maintained its deposit rate at a record low -0.5%, the level set in September at Mario Draghi’s last meeting as ECB chief. (The negative rate means that rather than pay interest to commercial banks on their overnight deposits, the central bank will continue to charge them for holding their cash.) Also unchanged: the ECB’s €20 billion per month bond-buying program, another September “sendoff” from Draghi.
Largarde faces a daunting challenge in attempting to stimulate the eurozone’s economy. Despite years of ECB asset purchases through quantitative easing (QE) and subzero interest rates, growth in the region has been paltry, hovering between 0.2%-0.4% for seven consecutive quarters. At the same time, inflation (just 1% in November) remains well below the ECB’s 2% target. Expectations for future inflation are also subdued, with investors anticipating an annual rate of about 1.3% over the long term.3  
But there are also positive signs afoot in the eurozone:
  • Economic data is improving. The Citi Economic Surprise Index recently nosed back into positive territory after staying below zero for nearly all of 2018 and 2019.4 (This index gauges the extent to which economic data releases diverge from consensus forecasts; the higher the index level, the more upside surprises.)
  • So is sentiment.  The Zew Indicator of Economic Sentiment, a survey of economists and analysts on the medium-term health of the eurozone, also turned positive, touching its highest level since March 2018 in December.5 Although we believe the region needs to boost growth in trade and investment to achieve a “breakout” year in 2020, it may be poised to narrow the gap with the U.S. 
  • Labor markets have continued to strengthen. According to Eurostat (European Statistical Office), the source of official economic data for the region, the unemployment rate in October fell to 7.5%, an all-time low. 
Amid this stable-to-improving environment, Lagarde may not feel as much pressure to deliver new or stronger monetary easing measures. On the other hand, if economic activity begins to slow, she may encounter considerable resistance within the ECB to lowering rates further or accelerating asset purchases. Several ECB officials have already opposed reviving QE. One argued that QE should be unleashed only when the eurozone faces a high risk of deflation, which doesn’t exist now. Another feared the ECB would be left without ammunition if the economy were to slip further. Such dissent could make it more difficult for Lagarde—who has expressed dovish views in the past—to ramp up stimulus efforts.

Boris basks in Brexit breakthrough  

Nearly 3½ years after the U.K. voted to leave the European Union, the U.K. appears ready to leave the European Union, thanks to the general election held on December 12.
U.K. Prime Minister Boris Johnson, who ran on a campaign pledge to “Get Brexit Done,” saw his Conservative Party win a resounding victory and extend its majority in the 650-seat House of Commons by 66 seats, to 365. Meanwhile, Jeremy Corbyn’s opposition Labour Party lost 42 seats and how holds 203.6 Corbyn had stumped for a second voter referendum on Brexit.  
But Johnson won’t have much time to celebrate. First, he needs Parliament to approve the temporary Brexit deal that he struck with the EU by January 31, 2020, the current deadline. Given his comfortable Parliamentary cushion, though, it’s a near certainty that lawmakers will vote “yea” to leave. 
Then the hard work begins. Johnson’s deal triggered a transitional period that governs ties between the U.K. and EU until December 2020. Absent an extension, which he has already rejected, the two sides need to hammer out details over a complex array of issues including trade, security, labor and the environment by the end of next year or the U.K. will “crash out” of the EU.  
In our view, Brexit is not a clear market or economic positive in its own right. But clarity on this issue would remove a major source of uncertainty that has plagued markets far longer than anticipated.
U.K. equities rejoiced at the election results, with the FTSE 100 Index returning 1.6% (in local currency terms) for the week. Stocks in Europe also got a lift, as the broad STOXX 600 Index gained 1.2%.7
Note to our readers: The Weekly Market Update will be taking a holiday hiatus and resume publication on Monday, January 6. 
  1. S&P 500 data from Haver, Marketwatch
  2. Treasury data from treasury.gov, Marketwatch
  3. GDP and November inflation from Trading Economics; long-term inflation from Bloomberg.
  4. Wall Street Journal
  5. Trading Economics
  6. CNN
  7. Marketwatch
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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