The last week’s market highlights:
Quote of the week:
“There are some things you can’t cover up with lipstick and powder./Thought I heard you mention my name, can’t you talk any louder?/Don’t come any closer, don’t come any nearer/My vision of you can’t come any clearer.” – Dave Edmonds, “Girls Talk”
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 4Q 2019 Outlook :
- U.S. economy: Still seeing signs of growth
- Global economy: Downward pressure but no recession.
- Policy watch: Markets expect more easing
- Fixed income: Opt for high quality, longer maturity
- Equities: Get defensive, stay invested
- Asset allocation: While cautious, still prefer emerging-market bonds
U.S. vs. China: “Scorecards! Get your scorecards!”
“Trade wars are good, and easy to win.” President Trump famously tweeted in March 2018. Few economists and market observers agreed with him then, and, in all likelihood, even fewer side with him now. But what’s undeniable is that keeping track of his trade war with China, now in its 17th month, has been challenging. Consider some scorecard “highlights” since just this summer:
- July: The U.S. threatens tariffs on $325 billion of Chinese goods despite promising not to do so two weeks prior.
- August: The U.S. labels China a currency manipulator.
- September: China and the U.S. agree to hold their 13th round of trade talks.
- October: The U.S. unilaterally announces a “phase-one” deal, which includes the cancellation of December tariffs. This pact remains unsigned.
- November: Shortly after White House economic advisor Larry Kudlow confirms that a trade agreement would include tariff concessions, Trump tells reporters that “China would like to have a rollback—I have not agreed to anything.”
Now December brings three new countries to the trade tempest.
Last week, Trump proposed imposing 100% tariffs on $2.4 billion of French goods in retaliation against a French digital services tax. The U.S. believes this levy unfairly targets American technology companies.
The president also announced the restoration of import taxes on steel and aluminum from Brazil and Argentina. Trump accused the countries of a “massive devaluation” of their currencies, which makes their agricultural products less expensive in overseas markets and hurts U.S. farmers. Although the U.S. first ordered tariffs on these metals in March 2018, Argentina and Brazil obtained exemptions before the taxes went into effect.
In our view, there’s little evidence that either country has sought to devalue its currency. Since 2018, the U.S. dollar has been steadily rising against most currencies, especially those of developing economies in Latin America.3 Despite active intervention from Argentina’s central bank, the peso has plunged almost 60% in 2019 amid a collapsing economy, rising sovereign default risk and the election of President Alberto Fernandez, largely viewed as a market-unfriendly candidate.4 For its part, Brazil’s central bank has also aggressively tried to boost the beleaguered real while blaming the currency’s recent slide on a diappointing oil auction that failed to attract large investors.
U.S. economy: Feeling “hot hot hot”
If investors still harbored doubts that the U.S. economy is likely to avoid recession, the latest employment report should help them rest easy. Employers added a “blow-the-doors-off” 266,000 new positions in November, easily topping forecasts for around 180,000. In addition, September (+13,000) and October (+28,000) payrolls were revised upward by a combined 41,000, raising average monthly job gains to 205,000 over the last three months and 180,000 for the year to date.5
Also on the positive side of the November ledger:
- The unemployment rate fell 0.1% to 3.5%, matching a half-century low. The U-6 underemployment rate also edged down, to 6.9%, equaling a 19-year bottom. (The U-6 rate encompasses both unemployed workers looking for jobs and part-time employees seeking full-time work.)
- Average hourly earnings (AHE) grew a solid 3.1% year-over-year for all employees. For nonsupervisory workers, AHE growth was even stronger (+3.7%), hovering near a decade high.
- The labor force participation rate among “prime-age” (25-54) workers held at 82.8%, a 10-year peak.
Looking ahead, we’ll be watching the effects of the jump in AHE. Pay is rising and employee productivity is falling in an environment of healthy consumer demand and a dearth of qualified workers to fill open slots. This mix may threaten profit margins or encourage a pickup in inflation. Since companies have already seen their bottom lines squeezed in 2019 due to fatter paychecks and higher import taxes, they might decide to pass higher costs on to customers in 2020.
Meanwhile, the global economy appears to be on the mend. JPMorgan’s Global Composite Purchasing Managers’ Index (PMI), which tracks manufacturing and service-sector activity, improved in November to 51.5, a four-month peak. (PMI readings above 50 indicate expansion.) China, the U.S. and the eurozone all recorded output growth, and business optimism remained resilient despite concerns over trade.