Communication Matters

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Belying the sharp downturn Tuesday, there are some positive economic developments as we head towards the turn of the year. U.S. PMI’s were strong across the board, leading off with the Chicago PMI jumping to 66.4 in November from 58.4; this was the highest in nearly two years. The good news did not stop there. Manufacturing PMI hit 59.3, up from 57.7. Employment continued to hum along at 58.4. Most importantly, New Orders made a big comeback to hit 62.1, interrupting a slide. Globally, the manufacturing sector is showing signs of stabilizing especially among the emerging market countries. On that front, Russia, Brazil and India are moving up and Europe may be stabilizing

What ails the market is perhaps unclear communication. President Trump’s tweet that he believes in tariffs, along with confusion over when the 90 day reprieve begins, has generated unnecessary uncertainty over policy direction. After some tamping down of concerns over the FOMC becoming more aggressive, New York Fed President Williams generated some uncertainty. While Williams praised the economy’s strength, he overlaid that with the view that growth is above trend. As such, he unwound the unwinding of rate expectations for 2019. To me, he sounded data dependent but I can imagine a strong non-farm payroll report of Friday will be read from a “Fed Responses” position rather than a “growth is good” perspective. I harken back to the November minutes which are more sober: “a couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations.” Putting it all together, a risk-management report appears to still be the order of the day.

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