The last week’s market highlights:
Quote of the week:
“After a good dinner one can forgive anybody, even one's own relations.” – Oscar Wilde
Each week, we present our featured topics in the context of the major themes listed below from the
Nuveen Q4 Outlook:
- U.S. economy: Still running ahead of its peers.
- Global economy: Trade a bigger concern outside the U.S.
- Policy watch: Trade risks haven’t bitten the U.S. yet, but that may change.
- Fixed income: Continue to position for rising rates.
- Equities: The price is right outside the U.S.
- Asset allocation: Finding pockets of opportunity.
U.S. economy: There was a lot at stake over steak
Trade took center stage last week. Political leaders from 19 member countries and the European Union gathered in Buenos Aires on November 30-December 1 for the annual G-20 Summit.
The summit’s main event, though, took place on the sidelines. Over a steak dinner with his Chinese counterpart, Xi Jinping, President Trump decided to postpone his plan to raise tariffs from 10% to 25% on $200 billion of Chinese goods—an increase originally scheduled to take effect on January 1. In exchange, Chinese agreed to purchase a yet-to-be-determined amount of U.S. industrial, energy, and agricultural products.
There was a caveat, however. If the two sides don’t reach a broader trade pact within 90 days, the White House will proceed with the higher tariff. This “truce” came as somewhat of a surprise. In a November 26 Wall Street Journal interview, Trump stated that it was “highly unlikely” that he would suspend this tariff increase. He also seemed prepared to follow through on his plan to tax an additional $267 billion of Chinese imports—another threat that has not yet come to pass.
Also making headlines last week was automaker General Motors (GM), which announced its intention to close five factories in North America and lay off about 14,000 workers next year. GM did not explicitly identify tariffs as a reason behind its decision. Instead, it cited reduced demand for passenger cars and, thanks to lower gasoline prices, a shift to roomier sport-utility vehicles and trucks.
Trade policy probably played a role, however. GM has been squeezed by higher input costs due to U.S. taxes on imported steel and aluminum. In July, the company estimated that these tariffs would ding its bottom line by more than $1 billion—enough to pay 24,000 assembly-line workers for a year, according to the Cato Institute.
In our view, tariffs could trim U.S. GDP growth by up to 0.3% in 2019. A further escalation with China, or new levies on auto imports, which Trump has previously considered, might knock off an additional 0.2% from economic output, for a total of 0.5%. Even so, the U.S.-China trade dispute is unlikely to send the American economy into recession or to derail global growth. But it may disproportionately hurt U.S. stocks. S&P 500 Index companies, for example, derive about 40% of their revenues from overseas operations.
Policy watch: Is Jay walking back his October hawkishness?
What a difference eight weeks make.
On October 3, Federal Reserve Chair Jerome (“Jay”) Powell said that interest rates were still “a long way” from neutral—the level at which they would neither stimulate nor depress the U.S. economy. Markets interpreted those words as hawkish. Fearing that the Fed might accelerate its pace of interest-rate hikes, stocks began a hasty retreat. The S&P 500 declined in 13 out of the next 15 trading days and lost nearly 7% for the month of October. U.S. Treasuries also suffered. For example, the yield on the bellwether 10-year Treasury note jumped 10 basis points (0.10%) on October 3 alone, en route to reaching a more than seven-year high of 3.23% just two days later.
On November 28, Powell appeared to sing a different tune, telling a Wall Street audience that interest rates were “just below” neutral. Markets cheered his slightly-more-dovish tone, concluding that the Fed wouldn’t raise rates too quickly or by too much. The S&P 500 surged 2.3%, its best one-day gain since March. Treasury yields were largely unchanged, but the dollar fell.
We believe equity investors may have overreacted to Powell’s comments, which were not necessarily as dovish as they might seem. New economic data, combined with the Fed’s insistence on remaining “data dependent” when plotting the course of interest rates, should keep the neutral rate a moving target.
Powell provided no further guidance on the Fed’s likely path of interest rates, perhaps one reason fed funds futures—which traders use to place bets on future Fed monetary policy—barely budged following his comments. Powell noted that the Fed’s gradual pace of tightening “has been an exercise in balancing risks.” On one hand, officials don’t want to raise rates too quickly, which could shorten the U.S. economic expansion. On the other hand, Powell and his colleagues are mindful that moving too slowly on rates can lead to higher inflation.
Echoing his prior optimistic assessments of the U.S. economy, Powell emphasized that “there’s a lot to like” amid solid growth, healthy levels of inflation, and low unemployment. Indeed, last week brought more good economic news:
- Both consumer spending (+0.6%), which accounts for more than two-thirds of U.S. GDP, and personal income (+0.5%) topped forecasts in October.
- Consumer confidence hovered near October’s 18-year peak, according to The Conference Board. Although consumers expressed a somewhat less-favorable view of future business conditions, they expect the U.S. economic expansion to continue.
- Inflation, as measured by the headline Personal Consumption Expenditure (PCE) index, increased 2% in October compared to a year ago. This figure has now hit or exceeded the Fed’s 2% target for eight straight months. Meanwhile, the “core” PCE index, which strips out food and energy costs and is the Fed’s preferred inflation gauge, dipped to 1.8% in October versus last year.
- While first-time jobless claims matched a six-month high, they remained at historically low levels.
This week brings a series of key economic data releases, most notably the November jobs report. Also on tap are gauges of the U.S. service and manufacturing sectors, and consumer sentiment.