Author: Brett F. Ewing, Chief Market Strategist | Date: 06 May 2019
December 2018 Google searches for “recession” hit the highest they’ve been since November 2009. It’s no wonder considering the deluge of negative headlines on trade wars, the Fed, the global economic slowdown, bear market levels on the S&P 500 and the government shutdown. The psychological effects from the negative headline environment resulted in business leaders and consumers both contracting their spending behaviors.
The Federal Reserve: Uncertainty has been removed
Low inflation has been perplexing to the Fed forecasters for years and is giving this Fed all the ammunition they need to stand pat on rate hikes. We believe the committee did an excellent job at the meeting last week staying neutral and should continue to pause, even in the face of stronger economic numbers in jobs and consumer sentiment. We are watching the dollar and believe stability in the currency will be important for our forecast to materialize in 2019.
Trade Wars Forward Progress: Uncertainty is still present even though progress has been reported
We believe an announcement in the coming months will reveal the strongest trade deal ever produced between the U.S. and China. A strong trade agreement will be measured by the quality of the enforcement mechanisms and will be the key to real change in China’s behavior regarding IP theft, forced joint ventures and the opening of business markets to the U.S. We also think both sides have a vested interest to conclude these discussions for economic and political reasons. Trump is looking to raise tariffs 25 percent on $200 billion of Chinese imports this Friday and on $325 billion more “soon”, which could put talks back on track for conclusion. But one of the biggest risks with the trade war would be a policy mistake - underestimating the vulnerabilities within China’s economy around their shadow debt.
U.S. Job Market Outlook: Uncertainty remains low, will face severe constraints due to skills gap in 2019
The April jobs report was conclusively strong. Although Jobless claims have increased over the last two weeks, we believe it’s not likely to evolve into a longer-term trend, the four-week moving average is still at 212 thousand (best in over 40 years). We are watching labor productivity rising at its fastest pace (3.6 percent) since 2014. Higher productivity is very important at this stage of the tighter labor market (unemployment rate 3.6 percent), thus keeping wage inflation in check and the Fed more comfortable in their inflation outlook.
We are coming out of a very high level of uncertainty in Q4 2018 created by trade wars, the Fed, the global economic slowdown, bear market levels on the S&P 500 and the government shutdown. This had a negative psychological effect on business and consumers and pushed them to change their spending behavior in the short run.
We have clearly seen this translate into weakness throughout PMI surveys and GDP data ending Q1. We also believe this weakness will be transitory as many of the uncertainties that initially created this behavior continue to fade into the headline distance.
Although the current Fed policy should be a positive for business leaders behavior change coming out of Q1, the trade war and tariffs continue to hang uncertainty over capital investment on a global scale.
That said, trade talks will most likely resolve issues over the next few months. The Fed will continue to be data dependent and the U.S. job market will remain strong resulting in stronger business and consumer spending and GDP for 2019.
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