The Fed will Keep the Funds Rate Unchanged

By | January 28, 2019

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Coffee and Economic Review

World stocks inched higher on Friday as strong earnings helped underpin investor sentiment in the face of growing signs the global economy is slowing amid the still unresolved trade dispute between the United States and China. European markets opened firmer, with the automakers and tach sector indices rising 1.5% and 1%, respectively. The pan-European STOX index hit its highest level since December 4. The MSCI All-Country World Index, which traces shares of 47 countries was up 0.3% on Friday and was set to break a four-week winning streak as economic data and cautious sounding from central banks pulled the index down half a percent for the week. Data at the start of the week showed China’s economy growing at the slowest level in 28 years, while purchasing manager indexes in Germany and the euro-zone indicated stagnation in the bloc.

U.S. fund managers continued to retreat from consumer-related stocks ad increased their defense bets out of concern the U.S. economy is slowing even though government leaders had reached an agreement to end the longest shutdown ever. The week brought the S&P 500 index down 0.2% for the week as earnings kicked into high gear. That left the gauge up 6.3% for January after the 9.2% tumble in December. Equities did hold their own in the face of the longest government shutdown ever combined with mixed messages on negotiations with China and a downward revision on global growth from the International Monetary Fund. The government might shutdown again on Feb. 14, so the market will be data dependent as earnings estimates are being modestly downgraded. Earnings from the S&P 500 are now estimated to grow 5.9% for all of 2019, down from a 10.2% estimate in October. Until another government crisis appears in mid-February, investors have a couple of weeks to digest earnings, China, Brexit and the slower moving U.S.  and global economies.

Freight rates for dry-bulk and container ships, carriers of most of the world’s raw materials and finished goods have plunged over the last six months, the latest sign the global economy is slowing significantly. The Baltic Dry Index, the measure of ship transport for materials like coal and iron ore, has fallen 47% since mid-2018, when a trade dispute between the U.S. and China resulted in the two biggest economies slapping import tariffs on each other’s goods. Dry-bulk commodities are taken as a leading economic indicator because they are used in key industrial sectors such as steel making and utility output. The signs that the U.S. and China are still far apart in trade talks continue to weigh on commodity markets. The Harper shipping index, which tracks container rates has fallen 30% since June 2018. Asia’s powerhouse Japan posted a weak manufacturing data in recent weeks. In China, the National Development and Reform Commission (NDRC) warned that downward pressure on the economy would impact China’s job market as falling factory orders point to a drop, in activity in coming months.

The partial government shutdown continued through last week and reports scheduled on new home sales and durable goods orders were postponed. We did get a look at housing by the National Association of Realtors that showed housing continues t falter in December. Sales of existing single-family homes fell 6.4% to a 4.99 million annual pace, the lowest since September 2015. December marked the end of a year where housing activity lost momentum. Details were less bleak. Inventories of homes on the market grew 6.2% for the year in December, a move that should lower price in coming months. In fact, price appreciation moderated to 2.9% y/y in December, the slowest rise since 2012. 30-year home mortgages fell in December and mortgage application activity picked up in early-January. This suggests housing activity may pick up a little in coming months, enough to keep the market treading water instead of sinking.

The Conference Board’s index of leading economic indicators fell 0.1% in December, held back by financial market volatility. A lot of data in the report was estimated by the Conference Board. The loss of government data is unnerving but there appears to be a modest loss of momentum in the U.S. economy. We are still far from recession readings. Real GDP is growing somewhere between 2.1% and 2.5% for the first quarter. The government shutdown lost the economy some 0.2% of a percentage point in growth, so we are still not doing bad. A further loss of momentum is expected over the course of 2019. Real GDP is projected to be growing near2% by year’s end. Recessions risks do increase as the year passes, as the government fiscal stimulus fades and interest rate increases catch up with economic activity. A lot depends on political developments. If the government can reach several funding deadlines, trade deals with China and other potential roadblocks will have a say in the economy’s development in 2019.

The focus for next week will be the January employment report and the Federal Reserve. The January employment report will incorporate the annual benchmark readings. The unemployment rate is likely to rise to 4.0% from 3.9% because of the government shutdown. Vehicle sales likely fell slightly. The ISM manufacturing index will be watched closely for further changes in manufacturing sentiment. The Fed will keep the funds rate unchanged as we look for words like “patient” to be inserted in the messaging.

Latest Data

The U.S. Economy:

Existing home sales fell sharply in December, falling 6.4% to an annual rate of 4.99 million. Existing home sakes were down 10.3% from a year earlier. Sales fell across all four Census regions. Sales of existing single-family homes totaled 4.45 million units in December, down 5.5% from November and down 10.1% from December 2017. Sales of existing condo/co-op sales totaled 540,000 I December, down 12.9% from November and down 11.5% y/y. The seasonally adjusted median single-family price was $261,220, down 1.2% from November, but up 3% from December 2017. The weakness in housing activity can be primarily traced to higher interest rates and the changes in the tax law that reduced deductibility. The government shutdown is not helping. Mortgage rates should settle down and that will help stabilize housing. We don’t see a growth market in the near term, but sales should settle down and stabilize.

The outlook for the U.S. economy has softened a bit. The Conference Board’s index of leading economic indicators declined 0.1% in December, following a modest 0.2% rise in November and a slight 0.3% decrease in October. Weekly claims for unemployment insurance made the largest positive contribution to the December reading. ISM new orders, building permits and stock prices were in negative territory and the average workweek for production workers made no contribution. Employment growth remains healthy, suggesting a still solid consumer and other data on production has been positive meaning that manufacturing may be hitting some bumps in the road but is still in a positive lane. Housing has been weak. The longer the federal government remains shut does increase negative probabilities. So far, the economy appears to be slowing but probability of a recession is still low if political events are resolved. Still, the economy’s growth rate is expected to slow from 3% to near 2% over the course of 2019.

International:

European Central Bank policymakers promised recently to tread carefully in removing any more stimulus, just as new fresh surveys pointed to an even bigger slowdown in the euro-zone’s growth. ECB President Mario Draghi waned that a dip in the 19-natin euro-zone’s economy could be longer than thought, signaling a delay in raising interest rates. The Ifo survey fell for a fifth straight month for Germany. Italy, France and Germany, the bloc’ largest economies barely grew in the final quarter of 2018 and the Ifo survey suggests 2019 is also starting off on a weak note. Inflation, the ECB’s primary mandate, is now seen dipping to 1.5% and only rising to 1.8% in the “longer-term.” Economists now expect the ECB to delay any rate increase to March at the earliest and perhaps later if data continues to soften.

Important Data Releases This Week

World stocks inched higher on Friday as strong earnings helped underpin investor sentiment in the face of growing signs the global economy is slowing amid the still unresolved trade dispute between the United States and China. European markets opened firmer, with the automakers and tach sector indices rising 1.5% and 1%, respectively. The pan-European STOX index hit its highest level since December 4. The MSCI All-Country World Index, which traces shares of 47 countries was up 0.3% on Friday and was set to break a four-week winning streak as economic data and cautious sounding from central banks pulled the index down half a percent for the week. Data at the start of the week showed China’s economy growing at the slowest level in 28 years, while purchasing manager indexes in Germany and the euro-zone indicated stagnation in the bloc.

U.S. fund managers continued to retreat from consumer-related stocks ad increased their defense bets out of concern the U.S. economy is slowing even though government leaders had reached an agreement to end the longest shutdown ever. The week brought the S&P 500 index down 0.2% for the week as earnings kicked into high gear. That left the gauge up 6.3% for January after the 9.2% tumble in December. Equities did hold their own in the face of the longest government shutdown ever combined with mixed messages on negotiations with China and a downward revision on global growth from the International Monetary Fund. The government might shutdown again on Feb. 14, so the market will be data dependent as earnings estimates are being modestly downgraded. Earnings from the S&P 500 are now estimated to grow 5.9% for all of 2019, down from a 10.2% estimate in October. Until another government crisis appears in mid-February, investors have a couple of weeks to digest earnings, China, Brexit and the slower moving U.S.  and global economies.

Freight rates for dry-bulk and container ships, carriers of most of the world’s raw materials and finished goods have plunged over the last six months, the latest sign the global economy is slowing significantly. The Baltic Dry Index, the measure of ship transport for materials like coal and iron ore, has fallen 47% since mid-2018, when a trade dispute between the U.S. and China resulted in the two biggest economies slapping import tariffs on each other’s goods. Dry-bulk commodities are taken as a leading economic indicator because they are used in key industrial sectors such as steel making and utility output. The signs that the U.S. and China are still far apart in trade talks continue to weigh on commodity markets. The Harper shipping index, which tracks container rates has fallen 30% since June 2018. Asia’s powerhouse Japan posted a weak manufacturing data in recent weeks. In China, the National Development and Reform Commission (NDRC) warned that downward pressure on the economy would impact China’s job market as falling factory orders point to a drop, in activity in coming months.

The partial government shutdown continued through last week and reports scheduled on new home sales and durable goods orders were postponed. We did get a look at housing by the National Association of Realtors that showed housing continues t falter in December. Sales of existing single-family homes fell 6.4% to a 4.99 million annual pace, the lowest since September 2015. December marked the end of a year where housing activity lost momentum. Details were less bleak. Inventories of homes on the market grew 6.2% for the year in December, a move that should lower price in coming months. In fact, price appreciation moderated to 2.9% y/y in December, the slowest rise since 2012. 30-year home mortgages fell in December and mortgage application activity picked up in early-January. This suggests housing activity may pick up a little in coming months, enough to keep the market treading water instead of sinking.

The Conference Board’s index of leading economic indicators fell 0.1% in December, held back by financial market volatility. A lot of data in the report was estimated by the Conference Board. The loss of government data is unnerving but there appears to be a modest loss of momentum in the U.S. economy. We are still far from recession readings. Real GDP is growing somewhere between 2.1% and 2.5% for the first quarter. The government shutdown lost the economy some 0.2% of a percentage point in growth, so we are still not doing bad. A further loss of momentum is expected over the course of 2019. Real GDP is projected to be growing near2% by year’s end. Recessions risks do increase as the year passes, as the government fiscal stimulus fades and interest rate increases catch up with economic activity. A lot depends on political developments. If the government can reach several funding deadlines, trade deals with China and other potential roadblocks will have a say in the economy’s development in 2019.

The focus for next week will be the January employment report and the Federal Reserve. The January employment report will incorporate the annual benchmark readings. The unemployment rate is likely to rise to 4.0% from 3.9% because of the government shutdown. Vehicle sales likely fell slightly. The ISM manufacturing index will be watched closely for further changes in manufacturing sentiment. The Fed will keep the funds rate unchanged ad we look for words like “patient” to be inserted in the messaging.


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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.