The last week’s market highlights:
Quote of the week:
“A committee is a group of people who individually can do nothing, but who, as a group, can meet and decide that nothing can be done.” — Fred Allen
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
Policy watch: Slow down, you move too fast
Much has transpired since December 19, when the Federal Open Market Committee (FOMC)—the group within the Federal Reserve that sets monetary policy—raised the federal funds rate to a target range of 2.25%–2.50%. In the aftermath of that hike, global equities endured a stretch of stomach-churning volatility, falling sharply by year-end before rallying in January. Moreover, political risks increased, fueled by Brexit, the U.S.-China trade dispute, and the U.S. government shutdown. In addition, economic growth cooled in China and Europe. Small wonder, then, that markets fully expected the Fed to pause when it met on January 30.
That’s precisely what happened. Markets were also looking for “a kinder, gentler” Fed through dovish policy guidance and via remarks from Chair Jerome Powell in his post-meeting press conference. They got those, too. For example, in its policy statement, the Fed removed a prior reference to “further gradual increases” of interest rates; it now plans to “be patient” when determining the pace and scope of future tightening. This outlook was reinforced in Powell’s Q&A session, when he stated that “the case for raising rates has weakened somewhat,” a far cry from the Fed’s assertion in December that two hikes were likely in 2019.
But the Fed wasn’t done with its policy U-turn. It signaled an openness to a slower pace of unwinding its massive Treasury and mortgage-backed-securities holdings if conditions warranted. (Currently, the Fed allows up to $30 billion of the former and $20 billion of the latter to mature each month without reinvesting the proceeds.) In contrast, Powell stated in December that shrinking the Fed’s balance sheet was “on autopilot.” That comment, which triggered fears of much tighter financial conditions, helped stoke the late-December equities sell-off.
The response to the Fed’s January 30 meeting—a drop in the dollar and higher stock prices over the rest of the week—supports our view that the Fed may have been even more dovish than investors had hoped or anticipated. In recent months, markets have fretted that an over-aggressive Fed might slow or even reverse U.S. economic growth. For now, those reservations seem to have been eased a bit.
U.S. economy: A jump in January jobs
Those waiting for the U.S. job creation machine to slow down will have to wait until February—at the earliest.
U.S. employers added 304,000 jobs last month, blowing past estimates of around 170,000. While December’s tally was revised lower by 90,000, it remained at a still-solid 222,000 payrolls. The labor-force participation rate among working-age Americans rose an impressive 0.3% to 82.6%, its highest level in almost nine years.
Meanwhile, although average hourly earnings grew just 0.1% last month, on a year-over-year basis they were up 3.2%¾still one of the quickest rates of annual wage growth in a decade.
Small negatives to January’s report were upticks in the unemployment rate and U-6 underemployment rate, to 4.0% and 8.1%, respectively. (The latter counts people without work seeking full-time employment as well as part-time workers looking for a full-time job.)
So what’s our overall view of this jobs report? First, some of the figures were likely distorted by federal workers seeking part-time employment during the shutdown. As a result, it’s hard to draw broad conclusions. Second, the private sector continues to create jobs at a blistering pace nearly 10 years into this economic expansion. Third, higher wage growth is attracting new entrants into the labor force. Employment data for February and March should tell us whether and to what extent the fast start to 2019 might persist.