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Tuesday, October 15, 2019

Special Guest Blogger: Tim Kearney

The Federal Reserve announced a move on Friday to alleviate pressures on the fed funds market. In a press release, the Federal Open Market Committee (FOMC) announced that it would buy short-term Treasurys beginning this week and lasting “…at least through Q2 2020.” The program would start with $60 billion of purchases per month, though that amount will be adjusted based on what the Fed believes is needed. The idea is to maintain bank reserves at levels “…at or above the level that prevailed in early September.” Given the recent confusion in funding markets, this move is positive — albeit a deep dive into monetary policy-making.

The Fed wants the market to realize this is a strictly technical action, and is not a return to quantitative easing (QE). How can we tell that? For one thing, the Fed is signaling its intention that the move is technical, demand-determined and not open-ended. It’s important to remember that part of how QE works is that it signals the central bank will do whatever it takes and to keep rates low and financial conditions easy for as long as it takes to achieve an objective. In this case, the Fed is attempting to bring its balance sheet to a level which it believes provides the proper amount of reserves for its actual monetary policy.

Separating the announcement of short-term Treasury purchases from an FOMC meeting implies it is monetary policy management, not monetary policy-making. In a sense, it’s the Fed recognizing that it had shrunk the balance sheet a bit too much and adjusting. That is proper monetary policy-making. The Fed and the markets are venturing into new waters here with the balance sheet as large as it has become, so it’s understandable that some participants would view this as a return to QE. I think that’s too big a claim; rather, the Fed is reacting to facts on the ground and taking the bull by the horns, which is good for the Fed’s credibility.

Thursday, October 10, 2019

The market has been seesawing up and down because of uncertainty surrounding the trade dispute with China. Investors know that the conflicts run far deeper than soybeans. Amidst all the political headlines and wrangling, trade is the paramount issue that matters. Trade is the grease that keeps the global economic wheels turning. Any true deal will take a while to negotiate and implement, so brace for ongoing volatility. But you may have noticed that any upbeat news regarding progress in trade negotiations has sent the market soaring. That is because a little good news goes a long way in a bull market.

The U.S. economy is slowing to a 2% growth rate, which clearly is not in recession territory. The labor market continues to exhibit broad-based strength and the Federal Reserve is trying hard to say all the right things. For a true view into the fundamental strength of the market, however, keep your eye on upcoming third-quarter earnings.

Please see “Fundamentals Drive the Market,” on page 5 of the Global Perspectives book.

Tuesday, October 8, 2019
Source: Bloomberg and Voya Investment Management

August brought a bit better industrial production report from Germany, a positive for the outlook though manufacturing remains under pressure. Production rose in August, while July was revised upwards. This was a modest uptick, perhaps pointing to a slow stabilization of the industrial sector; but other positives in Europe’s largest economy also rolled through in the past week or so. August retail sales beat expectations with July revised up. Germany’s unemployment rolls dropped a bit and the unemployment rate remains at a post-reunification low of 5% — as it has all year.

There are positives elsewhere in Europe as well. It’s worth remembering that most of Europe’s large country composite PMIs are above 50, i.e., in expansion territory — see graph below — and even Germany is just a bit shy at 48.5, leaving the Eurozone composite above 50. In our view, if Europe’s manufacturing sector begins to show some life, growth will move out of the recession risk zone quickly.

Source: Bloomberg and Voya Investment Management

Thursday, October 3, 2019

Investors are feeling an autumn chill in the markets, and the start of the fourth quarter has been bumpy. The latest negative manufacturing readings, combined with ongoing trade tensions, political wrangling and an overall global slowdown, are joining forces to keep investors on edge. Naturally, more defensive sectors such as utilities and consumer staples have performed better amid the uncertainty. Investors are looking forward to the start of the 3Q19 earnings season in a few weeks. Earnings should provide a more accurate view of the true economic backdrop.

Companies have been guiding downward, with some sectors such as energy and technology forecasting year-over-year declines in earnings. Current expectations are for a slight decline for overall S&P 500 earnings, but this has been the case in the last two quarters: companies put forth an overly negative scenario, only to surpass expectations and post growth. In the meantime, industrial weakness has not yet significantly affected labor trends; consumer confidence and spending remain elevated and central banks are keeping monetary policy firmly supportive.

Remember what happened last December? Investors ran for the hills only to miss out on the best January in 30 years. No need to hibernate yet, just grab a sweater and enjoy the cool autumn air.

Please see the latest Voya Global Macro Views – Recession or Slowdown, Three Indicators to Watch.

Tuesday, October 1, 2019
Source: Bloomberg and Voya Investment Management

Special Guest Blogger: Tim Kearney

A tough time for economic data. The Eurozone continues soft, though a bit of a leveling could be developing with the labor market and consumer confidence is relatively stable. A bit of good news is that the Eurozone unemployment rate in September continued its six-year fall, reaching 7.4% from 7.5% in August. That’s basically on top of the 20-year low of 7.3% from 2007, and well off the 12.1% high of 2013. The German unemployment rate is down to 5%, well off the peak of 12.1% in 2005 and the lowest rate since unification (though stagnant for some six months).

For the United States, however, there was a significant miss from the ISM manufacturing PMI this morning — and that is a major issue. ISM printed at 47.8, a ten-year low. Matching the recent run of manufacturing payroll data, ISM employment in this sector also took a hit, with “growth in employment” down sharply. While the recent industrial production report had intimated a bit of a rebound in 3Q19, there doesn’t appear to be legs to it. Ominously, both employment (46.0), new orders (47.3) and exports (41.0) continue to ebb, pointing to further weakness likely in 4Q19. The non-farms payroll report consensus on Friday is looking for a rebound to 130,000 (was 96,000), but manufacturing is at just 3,000.

The Markit manufacturing PMI measure is not showing quite the same recent drop, but either way the message is clear that this sector is hurting and the longer it drags on the more it hurts the economic outlook.

Please follow global manufacturing and services on page 9 of the Global Perspectives book.

Source: Bloomberg and Voya Investment Management

Thursday, September 26, 2019

Housing has become a stealth tailwind to the economy. Ultra-low mortgage rates are breathing new life into the housing market and raising anticipation of a reversal in the six quarters of decline in residential investment. New home sales were up 7.1% in August, a twelve-year high. Existing home sales defied expectations of a fall and rose 1.3%. Precursors of future activity were also positive. Building permits jumped 8%, the fastest pace since 2007. And housing starts soared 12%, to an annual rate of 1.36 million, the highest rate since June 2007. Home builders have been wary of the trade turmoil and its potential impact on consumer activity, but the drop in rates coupled with significant pent up demand are prompting more buyers off the sidelines. The National Association of Home Builders (NAHB) confidence indicator improved to its best level in a year in September.

Why does housing matter? While actual home building (residential investment) accounts for only 3–5% of U.S. GDP, housing-related services spending adds another 12–13% to the economy. More importantly, housing is usually the primary source of wealth for families and is integral to the confidence consumers need to keep the 11-year expansion going. A home is better than a pair of ruby slippers any day.

Please watch housing statistics on page 66 of the Global Perspectives book and note that in 2006 housing starts were more than 2.2 million.

Tuesday, September 24, 2019

Special Guest Blogger: Tim Kearney

There is a meaningful contrast between Eurozone (poor) and U.S. (better) manufacturing PMIs. First the worse news; the Eurozone came in worse than expected. After a modest stabilization in 2Q19 the downdraft has begun anew. Germany was especially weak, with a reading of just 41 compared to the Eurozone average of 45. Markit commentary was harsh, noting that the manufacturing recession is showing the worst readings since 2012 and that now services are moving lower at the weakest reading since 2014. New orders are falling at the fastest rate since 2013. The group estimates that 3Q19 GDP growth is likely to be barely above zero — with Germany and Italy in recession territory. Tough times for sure.

On the other hand, the U.S. PMI data seem to corroborate a stabilization of manufacturing, if not a bit of a rebound: manufacturing clicked in at a five-month high. The report also contained hopeful nuggets pointing to better times ahead: Markit noted, “Stronger rates of output and new order growth were the main factors [that] helped to boost the headline PMI in September, alongside a slight upturn in staffing levels.” The Atlanta and New York Federal Reserve Nowcasts are moving up towards trend. A better outlook for the United States for sure.

Please follow global manufacturing on page 9 of the Global Perspectives book.

Tuesday, September 17, 2019

Special Guest Blogger: Tim Kearney

Saturday’s drone attack on Saudi Arabian oil fields is the largest supply disruption in at least 40 years and affects some 60% of Saudi output. This is the fifth such attack on Saudi Arabia this year; if the attacks continue, they could impact global economic and political stability in addition to energy prices. Given the fires and extent of the attack, the magnitude of the rebuild is uncertain at present and will likely drive an upward bid to oil prices for the next few weeks at the least. The implications of the supply disruption can be broken down between oil exporters such as the United States, and importers such as Germany and China.

For the U.S., the supply disruption actually could provide some upside effects that might offset a slowing growth path. The U.S. has unused production capacity, which is likely to be put to use once it becomes clear that there is a new price floor. Also, as an energy exporter, U.S. growth should benefit from any improvement in the terms of trade, i.e., export/import prices.

Importantly, in the past the Federal Reserve generally has not responded to transitory supply shocks. Given the Fed’s preference for above-trend growth and low inflation, it is likely to stay on the easing path, meaning that it likely will cut the Fed funds rate by 25 basis points to help mitigate downside growth effects. The supply shock is likely to have a modest upside effect on inflation; given that inflation is below target, the Fed has a buffer there to utilize. Importantly, it can be argued that the rise in terms-of-trade is dollar-positive and the Fed might want to limit that impact. The key risk remains the impact on important oil importers such as Germany, France, China or India. Look for their authorities to respond to support their domestic growth rates.

Please follow oil price and intensity on page 61 of the Global Perspectives book.

Thursday, September 12, 2019

The Eurozone would be better served to not rely so heavily on the European Central Bank for driving the economy. It is clear that fiscal policy should be added to the mix in order to jump start their economy, but I do not think the rate cut alone will have its desired effect. Draghi’s initial “do whatever it takes” worked years ago, but taking Eurozone bond yields to -0.5 percent only reinforces the pessimistic sentiment in Europe. Therefore, the U.S. should take note of the consequences in the Eurozone before continuing on the same path.

The slashing of regulations in 2017 along with the expectation and ultimate delivery of tax cuts in 2018 created a boom in economic growth and investment in the U.S., allowing the Fed to raise rates eight times. In fact, instead of cutting rates at the Federal Open Market Committee’s September meeting, they should instead continue with pro-business policies in order to grow the economy. Just say “no” to cutting rates, and yes to fiscal policy.

Please see Global Perspectives Midyear Update for how good the U.S. Fundamentals are in 2019.

Tuesday, September 10, 2019
Source: Bloomberg and Voya Investment Management

Friday’s modest employment report should keep the Federal Open Market Committee on track for a Fed Funds interest rate cut next week. The headline print showed that 130,000 jobs were added, versus an expected 160,000; unemployment remained unchanged at 3.7%, while underemployment and labor force participation were each higher by 0.2%. Also, average weekly earnings of 3.2% came in above an expected 3%. The main story is the beginning of Census hiring, so the miss on private employment was actually a considerably larger 96,000 versus the 150,000 expected. Manufacturing returned to the recent average, adding 5,000 jobs. This, after the July report was revised all the way down to 4,000. While still above trend overall, the manufacturing report is nonetheless soft and adds to the continuing trend lower, matching recent ISM reports.

There could be a fly in the ointment, however. RDQ Economics notes that August notoriously gets revised higher: “There is a strong tendency for August payrolls to be initially under-reported. The first estimate of August payroll growth has come in below the prior three-month trend in each of the last 8 years and in 8 of the last ten years that the first release of August payrolls was revised higher with the September and October jobs reports.” Given that, the report is not so weak as to stampede the Fed into a 50 basis point cut in September.

Source: Bloomberg and Voya Investment Management


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