Markets have had a good start to 2019, with the S&P 500 rising by 7.9% in January. But can positive market sentiment survive more downbeat global economic data? An overtly flexible Fed suggests that policymakers see clouds ahead.
1. Fed Chair Powell has reassured markets that rate rises will be on a “wait and see” basis but not all U.S. data is turning down.
If the U.S. government stays back at work (page 2), the immediate economic effects of the shutdown should be reversed. But uncertainty will immediately resurface if there is another shutdown, with the negative impacts (quantifiable and non-quantifiable) already cited in a number of corporate earnings calls. U.S. consumer confidence also continued to slide in January. In the environment, Fed Chair Jerome Powell played it very carefully in the post-FOMC press conference this week, reminding his audience that the Fed’s policies are in constant evolution in light of global economic developments and noting recent softer data. A change in the Fed wording around rates to “wait and see” approach served to reassure markets, although it did also imply that the Fed sees real risks ahead. For the moment, however, the data is not universally pointing in a downwards direction: today’s non-farm payrolls release revealed a healthy increase of +304k in January.
2. Slowdown fears are more immediate in the Eurozone after poor Q4 2018 GDP growth data. Brexit fears also still cast a big shadow.
Across the Atlantic, yesterday’s Eurozone growth numbers may be creating more immediate policy worries for the ECB. Eurozone Q4 2018 growth slowed on a YoY basis and the Italian economy went into a technical recession (page 3). Consumer price inflation has also slowed in many Eurozone economies, with many still dealing (more than a decade on) with the aftermath of the global financial crisis in the form of high levels of unemployment. Forthcoming German data over the next week (page 4) could add to the gloom. The threat of a “no deal” Brexit also remains very real, with a UK parliamentary debate this week in effect mandating Mrs. May to reopen intractable Northern Ireland border backstop talks with the EU – as the clock continues to tick down towards the March 29 exit date.
3. Policy stimulus measures permit positive Chinese market sentiment to coexist with further data disappointments.
The battle between sentiment and reality is perhaps most obvious in China, where equities have continued to rise despite repeatedly disappointing economic data – pages 5 and 6. The Chinese government’s commitment to economic stimulus measures – across multiple policy fronts – is a reassurance here and we remain constructive on Chinese equities. Hopes also rest on U.S./China trade negotiations and there is still a long way to go here, even after the apparent progress at this week’s talks and China’s commitment to by more U.S. agricultural products.
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