The last week’s market highlights:
Quote of the week:
“Remember, hope is a good thing, maybe the best of things, and no good thing
ever dies.”—Andy Dufresne, “The Shawshank Redemption”
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
Global economy: PMIs open eyes, trade truce stays on track, Brexit brawl continues
As New York’s mayor from 1978 to 1989, Ed Koch often asked subway riders, “How’m I doin’?” Investors asking a similar question about the health of the global economy got some answers last week—and positive ones, to boot—from China:
- The Caixin Manufacturing Purchasing Managers’ Index (PMI) rose in March to an eight-month peak of 50.8, the first time since November 2018 that it has surpassed the 50 mark separating expansion from contraction. (This PMI focuses on smaller and privately owned companies.)The new orders subindex, a leading indicator, increased, and employment hit its highest level in over six years. Business sentiment improved as well.
- Manufacturing activity among larger, state-owned Chinese enterprises also shifted into expansion mode (50.5) in March, according to the PMI released by China’s National Bureau of Statistics.
- Lastly, the country’s services sector strengthened, with the non-manufacturing PMI registering a consensus-beating 54.8.
In the U.S., March PMIs from the Institute for Supply Management were mixed but still encouraging. Non-manufacturing activity, which makes up roughly 80% of U.S. GDP, missed forecasts but still notched a solid 56.1, while manufacturing (55.3) topped expectations.
Last week’s other major PMI release came from the eurozone, where Markit’s composite PMI fell only slightly, to 51.6. Manufacturing remains a major headwind to growth in the region, hampered by new auto emission regulations in Germany.
Taken together, these reports for China, the U.S. and Europe provide broad evidence that growth is stabilizing—and perhaps improving—in the world’s largest economies. Caveat: PMI readings are “soft” data, reflecting sentiment rather than actual economic activity.
Adding to last week’s mostly upbeat mood were encouraging rumors on the U.S.-China trade front. While the parties have made substantial progress and appear close to reaching an agreement, they’re still haggling over two key issues:
- The fate of existing tariffs on Chinese goods. Beijing wants the taxes on $250 billion of exports to be removed immediately; Washington is pressing to keep some in force to maintain pressure on China to comply with the deal.
- Enforcement. The U.S. would like to retain the right to slap punitive tariffs on China if it violates the agreement, while also prohibiting Chinese retaliation, whether in the form of tit-for-tat levies or challenges to U.S. tariffs at the World Trade Organization. China views this U.S. demand as a threat to its sovereignty.
And then there’s the latest in the Brexit drama, which headlines continue to highlight and markets continue to blithely ignore. Last week, U.K. Prime Minister Theresa May announced that she had asked opposition Labour leader Jeremy Corbyn for help pushing a Brexit deal over the finish line. (Thus far, Parliament has rejected May’s EU withdrawal agreement three times, and an array of alternative Brexit options has also failed to win a majority of support.) Involving Labour almost certainly means the eventual agreement with the EU will closely resemble a “soft” Brexit, with economic ties between the U.K. and EU remaining tight. Such an outcome would be positive for the British pound and U.K. equities, in our view.
U.S. economy: Ending the first quarter in style
After adding just 33,000 jobs (upwardly revised from 20,000) in February, the U.S. job market picked itself off the mat by creating 196,000 payrolls in March, comfortably ahead of forecasts of around 175,000. Average hourly earnings (AHE) slowed from February’s 3.4% year-over-year pace, the fastest in a decade, to a still-respectable 3.2%. Not everyone was disappointed with their “raises,” though. Rank and file workers saw their AHE increase 0.3% in March. In contrast, AHE for all employees—including supervisors—rose just 0.1%.
Overall, this employment data should please investors. Equity bulls will point to strong jobs gains as evidence that the U.S. economy still has plenty of gas left in the tank. Indeed, the S&P 500 Index returned 0.5% on April 5, the day of the report, extending its winning streak to seven consecutive days. Meanwhile, the slowing pace of AHE growth should appease bond holders nervous about higher inflation. And on cue, Treasuries rallied, albeit modestly, as the yield on the bellwether 10-year note edged down to 2.49%. (Bond yields and prices move in opposite directions.)
For its part, the Federal Reserve will likely give this release a “thumbs up.” Absent signs that the economy is about to overheat, the Fed can stay patient as it weighs future interest-rate hikes. Even so, evidence of labor market tightness—a leading indicator for inflation—remains amid a smaller labor force and a still-low U-6 underemployment rate. (The U-6 rate includes discouraged workers who have quit looking for a job and part-time workers seeking full-time employment.)
Although markets and the media often focus on month-to-month changes in the labor market, we recommend looking at 3- or 6-month time frames. In the first quarter, for example, the economy added a healthy 540,000 jobs, an average of 180,000 per month. Wage growth decelerated slightly during the period but still held above a 3% annual pace. And the labor force participation rate was essentially unchanged, as a large number of retiring baby boomers were replaced by formerly underemployed workers.
The recent inversion of the Treasury yield curve set off recession alarm bells. But March’s employment report, combined with robust U.S. manufacturing and service-sector PMIs, leads us to believe that the economy isn’t about to contract anytime soon. Hitting the “snooze” button on the recession alarm clock is appropriate, in our view.