Stocks drop, Treasuries rally as virus fears take a toll

Brian Nick

The last week’s market highlights:

Quote of the week:

"Now, you listen here! He's not the Messiah. He’s a very naughty boy!” —Terry Jones, as Brian’s mother, “Monty Python’s Life of Brian” (1979)
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./Global economies: Lead us not into recession

This coming Thursday, markets will pay a lot of attention to the government’s advance estimate of U.S. GDP growth for the fourth quarter of 2019. The data will likely show that the economy grew more slowly in the last three months of 2019 than in the previous nine. But rather than fixate on backward-looking measures like GDP, investors may be better served by taking a closer look at forward-looking indicators.
Consider the Zew Indicator of Economic Sentiment, a survey of economists and analysts on the medium-term health of the eurozone economy. Similar to consumer confidence surveys in the U.S., the Zew includes readings on overall sentiment as well as separate numbers for “current conditions” and “expectations” (the forward-looking component). Last week, we saw an unexpected surge in respondents’ expectations for growth in the region, and Germany in particular. The measure has swung from a -44 reading last August to +26 as of January.10
Consistent with this, economic data has soundly beat expectations in the eurozone since mid-December after disappointing over the prior 18 months, according to the Citi Surprise Index.11 Whether the expected European “bounce” will materialize—and how high the bounce might be—remains to be seen. Normally, though, accelerating growth in Europe is a bullish sign for global risk assets. Another hopeful sign for the region came in the form of January’s “flash” (preliminary) reading of IHS Markit’s Purchasing Managers’ Index (PMI) for manufacturing. This number showed improvement compared to December, while remaining below 50, the level that separates expansion from contraction.12
In the U.S., leading indicators aren’t pointing as strongly—or, at least, as uniformly—toward stronger growth ahead. The Conference Board’s LEI index for December, released last week, declined slightly for the fourth month out of the last five and is unchanged over the past year.13 The biggest drags in December were a rise in unemployment claims—likely due to one-off seasonal factors—and a drop in new building permits compared to November. The overall level of permits, however, is still far higher than it was a year ago,14 and construction has become a clear positive for U.S. growth.  
Interestingly, both “hard” data (driven by measurements of actual economic activity) and “soft” data (survey-based) leading indicators are still flat to negative. In contrast, market-based factors—tighter credit spreads, higher stock prices and a steeper yield curve—are all signaling better days ahead. The modestly negative trend in the U.S. LEI index is a sign that a robust pickup in growth is not yet imminent. Meanwhile, the ISM Manufacturing Index (similar to the IHS Markit PMI), and specifically the new orders component, is the one to watch. New orders represent the second-largest weight in the LEI index after the average hourly workweek for manufacturing workers.

Policy watch: Expect the expected from the Fed 

Against this economic backdrop, the Federal Reserve is almost certain to hold interest rates steady at its meeting this Wednesday, given the lack of major developments since officials met in December. A status quo U.S. economy (moderate inflation, mediocre growth) argues for status quo monetary policy.
The Fed itself probably doesn’t know whether its next rate move, whenever it occurs, will be a cut or an increase, but Chair Jerome Powell and his colleagues would probably prefer not to have to make any adjustments this year. It’s likely, however, that Powell will be asked about the Fed’s ongoing asset purchases meant to quell turmoil in the repo market (which we wrote about a few weeks ago), and his answer will be closely watched.
  1. MarketWatch
  2. World Health Organization
  3. FactSet
  4. FactSet
  5. FactSet
  6. MarketWatch
  7. FactSet
  8. Bloomberg
  9. U.S. Treasury Department
  10. Bloomberg
  11. Bloomberg
  12. IHS Markit
  13. The Conference Board
  14. U.S. Census Bureau via FRED
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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