Fear Time

February 6, 2018

FDR famously declared that the only thing we have to fear is fear itself, and markets have been finding plenty of that since share prices crested at the end of the week ending January 26th. The DOW is already down nearly 1% today and has dropped 9.2% in just over six sessions. Tuesday equity losses in the Pacific Rim amounted to 6.0% in Hong Kong,, 5.0% in Taiwan, 4.7% in Japan, 3.4% in China, 3.2% in Australia, and 2.2% in Singapore. European markets are almost all down more than 1.0%.

The six-day plus drop in the U.S. market is a bit over 40% record single-day decline of 22.6% on October 19, 1987. In some ways, the current circumstance is scarier than that one. Markets hit bottom after that single day’s crash, but this slide is cummulating day by day. The Fed reacted immediately with rate support in 1987 but do not have the latitude or will to do so this time. St. Louis Fed President Bullard’s remark that the strengthening labor market need not produce undesireably higher inflation seems to have been intended to counter market fear and is unlikely a sign that the FOMC is reconsidering its strategy. Interestingly, the Fed had a new Chairman then, just as it does now.

The U.S. government was held in utmost esteem back in 1987 but is now considered to be the problem rather than the solution. Deregulated U.S. financial markets, which caused the last world economic catastrophe, are back but not in a consistently applied way. The different treatment of Bear Sterns and Lehman Brothers ten years ago kicked the subprime mortgage crisis into high gear. The stiff punishment handed to Wells Fargo in this otherwise business friendly landscape creates new uncertainty, not unlike the decision to let Lehman go under. And then there are the bad technicals. By many yardsticks, equities had become extremely overpriced by late January, and they remain so even after the correction seen in recent days. True, economic trends globally and in the United States had been improving and at a quickening pace, but the tolerance of real economies to a return to normalized nominal and real interest rates remains unproven. Sometimes financial markets take their cue from real economic trends, but causation at other times can run the other way. This may be one of those times.

President Trump’s stance on trade has been worrisome, particularly since it appears to be at an inflection point between threat and action. The U.S. trade data released today may be the last straw. The goods and services deficit in December swelled to $53.118 billion, its widest imbalance since October 2008, and the 2017 deficit of $566 billion was 12.1% bigger than the 2016 shortfall and the largest calendar year gap since 2008 when the recession began. With the exception of Japan and central and South America, bilateral U.S. deficits increased across the board in 2017. That with Canada grew 60%. That with Mexico widened 10%. The deficit with OPEC doubled. The deficit rose over $20 billion against China to $467 billion.

Pulling a page from the Herbert Hoover playbook, Trump has expressed concern about falling stock prices in recent days but seemed to characterize this unpleasant development as fake by adding that the economy is strong.  Given the direction of the trade balance during his first year in office, he’d like to see the dollar weaker, and it did lose value after the market crash of October 1987. In contrast, it’s lately performed well. It rose overnight by 0.8% versus the Swiss franc, 0.6% relative to sterling, 0.5% vis-a-vis the euro, but 0.1% against the yen.

There was another piece of adverse U.S. economic news today. Job openings in December according to the JOLTS data fell to a 7-month low in December.

Gold and oil edged down 0.2% and 0.1% overnight. The ten-year Treasury yield rebounded five basis points. A plunge yesterday amid the equity market blood bath appears to lack continuity. Barring a shift in the Fed’s forward guidance, the previous upward trajectory seems intact. Sovereign debt yields in Europe did fall today in lagged follow-through of yesterday’s North American action.

Australia released disappointing trade and retail sales statistics. There was a A$ 1.358 billion goods and services trade deficit in December following surpluses of A$ 36 million in November and A$ 193 million in October. Retail sales sank 0.5% on month in December after having risen by 0.5% in October and then 1.3% in November.

As expected, the Board of the Reserve Bank of Australia left the Official Cash Rate unchanged at a record low of 1.5%, which has been the level since a pair of 25 basis point cuts in May and August of 2016. A released statement stressed that convergence upward on the bank’s inflation target is liable to be very gradual and reiterated that high household debt makes the outlook for personal consumption a continuing source of uncertainty in the economic outlook.

German industrial orders continue to sizzle, jumping 3.8% on month in December and 4.2% in the fourth quarter following a quarterly 3.7% increase in the third quarter.

Euroland’s retail purchasing managers index weakened more than anticipated in January, printing at a 5-month low of 50.8 versus 53.0 in December. Germany, France and Italy each had mult-month lows in their retail PMI results.

Germany’s construction PMI jumped 6.1 points to an 82-month high of 59.6 in January.

The Canadian trade position ran a C$ 3.186 billion deficit in December, much greater than forecast and a contrast with a surplus of C$ 250 million in the final month of 2016. In 2017 as a whole, exports (5.3%) and imports (4.7%) had expanded similarly, but December-versus-December comparisons produced vastly different on-year increases of 0.4% in exports but 7.8% in imports.

Canada’s IVEY-PMI index fell to an 8-month low of 55.2 in January from 60.4 in December.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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