The last week’s market highlights:
Quote of the week:
“To err is human. To really foul things up requires a computer.” – Bill Vaughan
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2020 Outlook :
- U.S. economy: No recession in sight.
- Global economy: A clearer path for growth.
- Policy watch: Fed looking to stand pat as Brexit and trade risks abate.
- Fixed income: Low yields, tight spreads.
- Equities: Cyclicals and eurozone stocks set to lead.
- Asset allocation: No big bets with valuations rich in most spots.
U.S. economy: The labor market didn’t “slack off” in January
After generating an average monthly gain of 175,000 jobs in 2019, the economy added a far-better-than-forecast 225,000 payrolls in January despite a drop in the number of manufacturing positions.5 The headline unemployment rate and U-6 underemployment rate both rose, to 3.6% and 6.9%, respectively, but for “good reasons,” as more people entered the workforce. (The U-6 rate encompasses both unemployed workers looking for jobs and part-time employees seeking full-time work.) Indeed, the labor force participation rate (63.4) matched its highest level since June 2013. Among prime-age workers, those 25-54 years old, the share of the population with a job was the highest in almost 19 years. Clearly, there seems to be some slack left in the labor market.
Although January’s modest increase (+0.3%) in average hourly earnings growth was a bit of a disappointment, upward revisions lifted the year-over-year gain to 3.1% for all workers and 3.3% for those in non-managerial positions.
The government also revised past years’ payroll data. While 2019’s average monthly private sector job creation was lowered by just 1,000, to 161,000, 2018’s growth was cut substantially, from 215,000 to 183,000, meaning private payroll growth hasn’t averaged 200,000+ jobs per month for a full year since 2016. Still, this report marked a good start to the year.
Global economy: A modest jump in January
With the possible exception of short sellers looking to profit from falling markets, investors generally don’t want to see global pandemic scares like the current coronavirus outbreak. But if one does emerge, the “best” time for it to happen is probably when the global economy is showing broad and durable signs of acceleration, making it potentially more resilient in the face of virus-related impacts.
We saw such signs last week. Several January data releases provided evidence that our expectations for a “clearer path for growth” are on the mark:
- The JPMorgan Global Composite Purchasers’ Managers’ Index (PMI), which tracks both manufacturing and service-sector activity, rose to 52.2, a 10-month high. (Readings above 50 indicate expansion.) The upturn was broad-based, with the U.S. and U.K. joining emerging-market economies including China, Brazil, Russia and India. Among the highlights: New orders and business sentiment increased, encouraging companies to boost employment for the third straight month.
- In the U.S., the ISM manufacturing index (50.9) turned positive in January after five months of contraction. Service-sector activity remained in expansion mode (55.5) for the 120th consecutive month.
- Markit’s eurozone composite PMI (51.3) enjoyed its best month since August. Manufacturing showed welcome signs of stabilizing after 2019’s sharp downturn, and the service sector stayed encouragingly in growth mode, thanks largely to the improving labor market. Unemployment in the region dipped to 7.4% in December, a 12-year low, according to Eurostat.
If the spread of the coronavirus accelerates, leading to increased fears about its negative effects on growth, these sentiment-based economic surveys are likely to stumble later in the first quarter. Yet last week’s rebound in global equity markets after the prior week’s selloff suggests that investors believe any hit to the global economy will be temporary.
How big a hit? That will depend largely on how the outbreak plays out from here. Even if the worst is behind us, China’s GDP growth may well fall from an annualized 6% pace in the fourth quarter of 2019 to 4% in the first quarter of 2020.6 That deceleration could happen despite the latest stimulus efforts by the country’s central bank, the People’s Bank of China (PBoC). According to Reuters, last week the PBoC injected 1.7 trillion yuan, or around $240 billion, into the financial system to boost liquidity and restore market confidence.
Given China’s prominence in the world economy, a first-quarter slowdown of that magnitude would likely hurt commodity prices, business investment, and trade flows, at least for the first half of the year. Last week, for example, oil fell into a bear market, generally defined as a decline of at least 20% from a recent peak. Brent crude, the global oil price benchmark, dropped to $54/barrel on February 3 from $70.25/barrel one month earlier.7 But oil can bounce back quickly, especially if OPEC imposes supply restrictions, as it’s currently anticipating. As for business investment and levels of trade, we doubt that sluggishness on those fronts will significantly dent U.S. or eurozone growth, considering both measures were already weak heading into 2020.