Melancholy December

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Special Guest Blogger: Tim Kearney

The year’s endnote is downcast — not just because equity markets have slid hard, though that is reason enough — but because two years into the administration of President Trump, the first cracks in positive sentiment have opened up in the United States. As a reminder, sentiment measures are important for the “animal spirits” that drive risk-taking and investment. While sentiment is higher than November 2016 for sure, note that the University of Michigan Consumer Sentiment Index, the Empire State Manufacturing Survey, the NFIB Small Business Optimism Index and the weekly Bloomberg Consumer Comfort Index all dropped over the past month. The declines are nothing precipitous, but could develop quickly as a negative shift to the outlook.

A burgeoning story, higher interest rates have hit housing rather hard. December NAHB sentiment fell to 56 from 60 in November and 64 in October. The indicator hit its lowest level in three years, with drops recorded in each subsector — though bad weather likely contributed to the declines.

Inflation remains calm. U.S. CPI and core CPI in November were 2.2% year-over-year. PPI fell to 2.5% YoY, down from 2.9% in October. ISM prices paid fell by a sharp 11 points to 60.7 in November from 71.6 in October. Import prices rose just 0.7% YoY, down from 3.3% in October. Export prices rose by 1.8%, down from 3.1%. Real average weekly earnings remain below 1% at 0.5% YoY in November. While expectations are for a 25-basis-point hike in the Fed funds target rate today, market expectations remain very “dovish” on 2019 rate moves. It appears that the market is expecting barely one rate increase in 2019. Given low inflation rates and anchored inflation expectations — Univ. of Michigan inflation expectations dropped in December, break-evens have moved lower — the Fed will have to be data-dependent to move on rates in 2019. We expect two hikes are likely.

Please see page 34 of the Voya Global Perspectives book for insight into the Fed funds target rate.

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