Date: December 10, 2018
United States:
Federal Reserve Officials Search for the Elusive ‘Neutral’ Interest Rate
The word “neutral” is usually as boring as beige. But not when it’s coupled with “interest rate.” Stocks leaped on Nov. 28 when Federal Reserve Chairman Jerome Powell opined that short-term interest rates were just below their “neutral” range. Investors concluded that the central bank was almost done raising interest rates, sending the Dow Jones industrial average up 618 points, or 2.5 percent. Powell, 65, is a seasoned Washington lawyer, ex-Treasury official, and former private equity executive who served on the Fed’s Board of Governors for six years before President Trump elevated him to chairman in February. He knows all about message discipline. Yet in alluding to the neutral interest rate, he waded into one of the biggest controversies in economics. Even within the Fed’s Federal Open Market Committee (FOMC), which sets the target for the benchmark federal funds rate, there’s deep disagreement on the topic. One handy definition of the neutral interest rate is the rate that you’d want when the economy is at Goldilocks perfection. In that situation, there’s no need to raise interest rates to dampen inflation pressures or lower them to encourage companies to hire. Keeping the rate at neutral is like driving with cruise control—you can keep your foot off the gas and off the brake. In practice, things are considerably more complicated. The economy is rarely at that ideal speed, and even when it is, the Fed can’t be sure if the interest rate prevailing at the time is neutral. Maybe it’s too low and inflation is about to accelerate, or maybe it’s too high and unemployment is about to rise.
Europe:
U.K. Economy Loses Steam as Battle Over Brexit Rages
The U.K. economy lost momentum in the three months through October, a further sign of the toll being taken by Brexit uncertainty. Growth slowed to 0.4 percent from 0.6 percent in the third quarter, the Office for National Statistics said Monday. In October alone, growth was just 0.1 percent, with the economy being spared a third month of stagnation by a rebound in the dominant services industry. A heatwave-induced surge in the early summer proved short lived. Fears about a no-deal Brexit are weighing on confidence in the final quarter, as shown by recent purchasing-management surveys. Growth slowed across all key sectors of the economy from the quarter though September. Annualized growth was 1.4 percent. The figures come a day before a crucial vote in Parliament. Lawmakers are expected to reject the deal Prime Minister Theresa May negotiated with the European Union, potentially putting Britain on a path out of bloc with no deal on March 29. Markets see the Bank of England refraining from interest-rate increases for another year at least. But the inflation shock from a chaotic Brexit may make it hard to loosen monetary policy to aid the economy, as officials did after the 2016 referendum.
Asia:
The China Developments May Knock Your SOX Off: Taking Stock
Macro is on the mind following weaker China data over the weekend and the continued spat over the Huawei CFO’s arrest showing no signs of abating. Asian markets fell early though pared some of those losses as the session wore on, likely cushioning some of the impact across Europe and into the S&P futures. Despite signals over the weekend, frankly could be a lot worse considering the less than 10 handles. As mentioned last week, you may be left wanting for major catalysts today, as with the exception of CPI and PPI figures on the data front Tuesday and Wednesday, equities will likely be taking their cues from trade diplomacy among a dearth of earnings. You could look at the chemicals, as European names fell Monday in the wake of the BASF warning Friday. U.S. names Eastman Chemical, DowDupont, LyondellBasell Industries NV bore the brunt in late afternoon trade with Europe closed. Defense names may also have an opportunity to reverse after President Trump was reported to have affirmed the budget request from Defense Secretary James Mattis. Trump had just last week called the defense budget “crazy.” Goldman Sachs too, is bullish on defense names with Northrop Grumann, Lockheed Martin, Kratos, and Flir as top picks in 2019. Marijuana names Aphria, Cronos, Canopy Growth and now Altria (following their investment Friday) may be in focus after last week’s bookend-ed drama that saw the sector plummet early in the week after a short seller call’s on Aphria Inc.’s business dealings (Citron followed with an opposing viewpoint). Friday saw Altria legitimize another pocket of the industry with its $1.8 billion deal for a stake in Cronos.