Buoyant markets have been willing to overlook mixed economic and political news, reassured by the Fed’s commitment to be patient. But while patience is a virtue – for both policymakers and investors – it is also not inexhaustible.


1. Markets have faced mixed news and data this week, but have remained generally optimistic.

Markets have had to process an extraordinarily wide range of data and events this week. Important economic data (e.g. U.S. GDP, Eurozone and Chinese PMI) has been accompanied by a variety of largely unrelated political news (e.g. Trump Chinese tariff deferment, Trump/Kim summit, Cohen testimony and Brexit). Some of this data and news has been good; some of it less reassuring. But markets have ridden through it, with their sustained gains in marked contrast to their end-2018 volatility. The S&P 500 is up around 11% YTD, Chinese equities (as measured by the CSI 300, see page 6) have gained over 20% YTD and even the laggardly DAX has managed an 8% return.

 

2. This is due to the Fed’s evident caution around rate rises, and faith in the efficacy of Chinese policy intervention.

The main reason for this market insouciance is easy to identify: the commitment of Federal Reserve Chairman Jerome Powell and his colleagues to be patient in evaluating the U.S. economic outlook before making policy changes (page 2). Markets have enthusiastically bought into this promise, allowing them to overlook some mixed domestic data and also a lack of concrete progress – at least so far – on U.S./China trade discussions. Markets also appear to be confident that the Chinese authorities will continue to intervene on multiple fronts and that such intervention will eventually stabilize the Chinese economy: this faith has allowed the ongoing rally in Chinese equities to be barely dented by some notably poor Chinese manufacturing PMI data on Thursday. Disappointing events such as the Trump/Kim summit (page 5) have had only a very limited impact on global markets.

 

3. But Fed rate rises cannot be avoided for ever – and, in the more immediate future, expect market jitters.

But while patience – amongst both policymakers and investors – is probably to be applauded, it is unlikely to prove inexhaustible. The Federal Reserve may judge it sensible to pause rate rises in the short term, but continued U.S. expansion (as evidenced by strong Q4 GDP and housing data, as well as this week’s Chicago PMI) will mean that they cannot be avoided for ever – we forecast one more Fed rate hike over the next 12 months. In the more immediate future, while markets are likely to get some further lift from even a very minimal U.S./China trade deal over the next month, we suspect that they may also start to get increasingly jittery: stay vigilant on volatility.

 

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