Anxious Times for Investors

January 24, 2019

Investors continue to face three big uncertainties: the U.S. government shutdown, the fast-approaching Brexit deadline, and the failure so far of U.S. and Chinese trade negotiators to reach a mutually satisfying agreement.

  • Planned senate votes on the border wall and shutdown are not likely to pass. The on-again, off-again scheduled state of the union address scheduled for March 29 is presently postponed.
  • British Prime Minister Theresa May has made only small cosmetic changes to the Plan A deal that parliament already defeated overwhelmingly. She’s hoping that her survival of a no-confidence vote and the shortening interval to reach a deal will persuade members of parliament to accept Plan B rather than risk no deal at all.
  • Commerce Secretary Ross said a U.S.-Sino agreement is still miles and miles away, but he remains hopeful that a deal can be struck before the March 2 deadline when President Trump has promised to raise tariffs if the sides are still deadlocked.

In addition, today, there’s been more unsettling data news from Japan and the euro area.

  • Japan’s manufacturing purchasing managers index declined 2.6 points to 50.0 in January, connoting a lack of any growth for the first time in 29 months. Export demand is at a 2-1/2 year low as well, and business sentiment is at its weakest since 2012.
  • Euroland’s composite purchasing managers index fell 0.4 points to a 66-month low in January of 50.7. Weakness was shared by manufacturing (a 50-month low of 50.7) and services (a 65-month low of 50.8). Optimism regarding the future ticked only slightly above December’s 4-1/2 year low, and inflationary pressure eased. But all in all, if January is replicated in the coming two months, real GDP is likely to rise only 0.1% in the present quarter.
  • France did even worse than the euro area as a whole. The composite PMI in Euroland’s second largest economy declined further below the 50 line of neutrality, losing 0.8 points to 47.9, which is a 50-month low. Depressed by the yellow vest protests, real GDP may be headed for a contraction this quarter. Service sector activity, which much of last year surpassed the performance of manufacturing, is now the weakest link. The services PMI declined 1.5 points to a 59-month low.
  • Germany in January recorded a 2-month high in its composite PMI of 52.1. But aside from December’s 66-month low, the January score was the second lowest since the last month of 2014.The index for factory output hit a 69-month low.

Four central banks announced the results of their latest monetary policy reviews today. The most significant of these was the European Central Bank, which left its interest rate structure, policy of reinvesting the principal on maturing bonds acquired previously,  and policy forward guidance unchanged despite acknowledging that the balance of growth and inflation risk had shifted to the downside. Since interest rate cuts in March 2016, a zero percent refinancing rate has been flanked by an overnight deposit rate of -0.40% and a marginal lending rate of 0.25%.

Bank Negara Malaysia’s overnight policy rate of 3.25% was left unchanged. Such was raised a year ago by 25 basis points¬† to that level in the first increase since 2014. Malaysia’s Monetary Policy Committee released a statement that projects a steady upward growth path this year and moderately higher inflation in 2019 than the 1.0% pace in 2018. Officials consider an accommodative stance to be still appropriate in order to ensure sufficient liquidity and foreign exchange stability. This year is likely to see softer government spending and export growth, but domestic financial markets have been resilient.

The Bank of Norway’s policy interest rate was raised last September for the first time in 7 years. It’s now 0.75% versus 0.5% where it had been since a series of reductions totaling 175 basis points that ended in March 2016. A released statement noted a weaker global growth outlook but also higher recent inflation than assumed previously and concluded on balance that March 2019 remains the likeliest timing for a second hike of the policy interest rate.

South Korea’s first central bank base rate hike since 2011 was engineered in November 2017, and a second 25-basis point increase to the current level of 1.75% followed in November 2018. Bank of Korea officials justify keeping the policy stance unchanged despite real GDP expanding in line with the economy’s supply potential because of two major factors. The first is a slower global growth outlook due to various risks such as protectionism, Brexit, and Fed rate normalization. The second reason is that inflation has recently slowed to around 1% and is not expected to reach the mid-1% range until much later this year.

Australia’s jobless rate returned to 5.0% at yearend, the level in both September and October after ticking up 0.1 percentage point in November. Employment went up 21.6K despite a second straight monthly decline in the number of full-time workers.

Composite and service sector purchasing managers indices compiled by Commonwealth Bank of Australia were at record lows in January, while the manufacturing PMI ticked up to a 3-month high. This data series only began about three years ago.

Japan’s index of leading economic indicators in November was revised down 0.2 index points to a 2-year low of 99.1. The index of composite economic indicators has lately exhibited a “weakening trend.”

Filipino GDP expanded 6.2% last year, a half percentage point less than growth in 2017.

The dollar is little changed except against a weaker Australian dollar.

U.S. share prices are also little changed. The Nikkei closed down 0.1%. Other stock markets in the Pacific Rim rose 0.8% in South Korea, 0.7% in Hong Kong, 0.6% in Singapore and 0.4% in China and Australia. The British Ftse is down, but most major Continental European bourses moved up.

Ten year sovereign debt yields are three or more basis points lower in the U.S., Germany, and Great Britain and hovering around zero percent in Japan. Gold and oil prices are moderately lower.

In spite of the federal government shutdown, U.S. new jobless insurance claims last week totaled only 199K, the first sub-200K result since the week of November 5, 1969.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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