Domestic Economy Strong, But Signs Emerge of Slowdown Overseas
Eurozone growth waning; trade uncertainty impacts manufacturing
A strong jobs report and an uptick in the nation’s manufacturing economy were among January’s highlights, indicating that the U.S. economy is still poised to grow despite the government shutdown and signs of moderating and even contracting economies overseas.
The strong data come amid a significant slide in consumer confidence – the University of Michigan’s Index of Consumer Sentiment for January fell to its lowest level since October of 2016, for example. But January did witness a rally for risk assets (namely, stocks) across developed and emerging markets, with equity markets rebounding from the fourth quarter’s rout.
With signs that inflation remains under control, for now, the Federal Reserve also kept short-term interest rates unchanged in January and said it would be patient in determining future adjustments to the fed funds rate – given global economic and financial developments. Reflecting concerns over the pace of its balance sheet reduction, which one camp of market participants have attributed to less liquidity and tighter financial conditions, the Fed also said it is prepared to adjust the details for completing balance sheet normalization in light of economic and financial developments. 1,2
For now, the jobs market shows that the U.S. economy is able to withstand the ongoing trade dispute (currently a trade truce, of sorts) between the U.S. and China, along with deceleration in other global trading partners’ economies. With nonfarm payrolls rising to a seasonally adjusted 304,000 in January, the labor market posted its 100th straight month of increased employment. January’s payroll additions compared to an average monthly gain of 223,000 in 2018, the Labor Department reported.
Wage Pressures Yet to Emerge
The unemployment rate rose marginally to 4.0%, from 3.9% in December. Thousands of federal workers counted as temporary layoffs because of the government shutdown contributed to the increase, the Labor Department said.
Wage growth also continued to rise, but at a pace that is, at the moment, consistent with the Fed’s take on inflation. Average hourly earnings rose by 3 cents to $27.56, compared to 10 cents in December. Over the year, average hourly earnings increased by 85 cents or 3.2%, according to the Labor Department. 3
Writing in his Marc to Market blog, Marc Chandler, managing partner and chief market strategist at Bannockburn Global Forex, said that the “Fed’s pivot” means that the jobs report will not boost the chances of a rate hike in the next several meetings. “Strong jobs growth without wage pressure does not push the Fed away from its patient and flexible stance,” he wrote. 4
Chandler, though, cautioned that the 304,000 net new jobs figure may overstate the momentum at the start of the year, given the prolonged government shutdown and the Artic freeze a good portion of the country experienced in the later stages of the month. The Labor Department also revised downward previous payroll growth numbers in December and November by a net 70,000, while January’s addition to manufacturing jobs was the weakest in five months.
January Rebound in Manufacturing
On the manufacturing front, the Institute for Supply Management (ISM) reported that its manufacturing index increased by 2.3 percentage points to 56.6 in January. The most recent report follows three declines in the past four months and a gloomy December report that showed significant declines in new orders and production. In January, however, the ISM’s index of new orders rose 6.9 percentage points to 58.2, while the production index was up 6.4 percentage points to 60.5, compared to the previous month. 5
The organization’s index that tracks prices also fell below 50 (into contraction territory) to 49.6, another potential data point that gives the Fed room to pause on interest rates. In addition, in a sign that softer global demand is more than just an afterthought for manufacturers, the index tracking new export orders fell for the 35th straight month.
Comments from respondents were mixed, with concerns arising over higher oil prices, margin pressures, the government shutdown’s impact on the ability to launch new products and signs of new orders potentially slowing in the latter stages of the first quarter. Those manufacturers reporting a more upbeat tone cited the benefits of a strong economy, a steady supply and production environment, and sales and demand tracking forecasts.
Cooling Global Economic, Manufacturing Activity
The expansionary trends U.S. manufacturers are currently experiencing contrast with activity in the eurozone and China. In late January, the European Central Bank (ECB) downgraded its assessment of eurozone economic activity, acknowledging that “the near-term growth momentum is likely to be weaker than previously anticipated,” in a statement on January 24.
The ECB said incoming data continued to be weaker than expected due, in part, to a slowdown in external demand compounded by individual country and sector-specific factors. The central bank also said it expects to keep interest rates at their current level until at least this summer or as long as needed to support inflation at or near 2.0%. 6
The statement comes just about six weeks after the ECB had already cut its growth forecasts and said it would stop buying bonds as part of its €2.6 trillion quantitative easing measure announced back in January 2015. It also comes as some countries within the zone are experiencing weakening purchasing managers reports.
In Germany, manufacturing activity entered contraction territory for the first time in four years, while the pace of contraction gathered pace in Italy. Purchasing manager index data from IHS Markit for January show Germany’s manufacturing PMI at 49.7, while Italy’s PMI fell to 47.8 – a low not seen for more than five-and-a-half years (readings below 50 indicate that the manufacturing economy is contracting, above 50 indicate expansion).
Spain and France bucked the trend, posting two- and three-month highs at 52.4 and 51.2, respectively. In the eurozone, the overall reading was 50.5, compared to 51.4 in December. The marginal improvement was at the slowest rate for more than four years. “The January PMI adds to the likelihood that the manufacturing sector is in recession and will act as a drag on the economy in the first quarter,” Chris Williamson, IHS Markit’s chief business economist, said in a statement. 7
In China, where economic growth is slowing and manufacturers have been facing industry restructuring, newer pollution controls and the ongoing trade issues with the U.S., the Caixin China General Manufacturing PMI fell to 48.3 in January, from 49.7 in December. That was the lowest reading since February 2016.
The underlying data indicated that domestic demand was muted. New export orders from abroad, however, rose above 50 and reached its highest point since March 2018, demonstrating a rebound since the truce in the China-U.S. trade war, noted Zhengsheng Zhong, Caixin Insight Group’s director of macroeconomic analysis. 8
Real Estate: Lower Mortgage Rates, Inventory Levels Drove More Activity in January
One of the key factors going into 2019 for residential real estate is whether the weakness that overcame the housing market toward the end of the year will continue. In November, mortgage rates topped out at nearly 5.0%, the highest since 2011. But inventory levels began to loosen up, providing more supply to buyers and slightly tipping the market away from the advantage buyers had been commanding in the supply and demand equation.
Price appreciation has also slowed somewhat. But affordability is still an issue. Prices for homes as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price Index rose by 5.2% on an annualized basis in November, down from 5.3% in the previous month, the most recent available figures show.
“The pace of price increases are being dampened by declining sales of existing homes and weaker affordability,” David Blitzer, managing director at S&P Dow Jones Indices, said in a statement. “Sales peaked in November 2017 and drifted down through 2018. Affordability reflects higher prices and increased mortgage rates through much of last year,” adding that a shift in Fed policy in December led to mortgage rates falling back to 4.45% from 4.95%. 9
Sales of existing homes fell 6.4% in December from the previous month to a seasonally adjusted annual rate of 4.99 million, according to the National Association of Realtors (NAR). Compare to a year ago, sales were down by 10.3%. A potential bright spot in the report was that inventory was at a 3.7-month supply at the current sales pace. While that fell from 3.9 months of supply in November, the most recent inventory figure is up from a 3.2-month supply in the prior year.
Steadily rising inventory is a “positive development” and one that could lead to slower price appreciation,” Lawrence Yun, NAR’s chief economist said, in a press release. “But there is still a lack of adequate inventory on the lower-priced points and too many in upper-priced points.” 10
There are signs, though, that the pricing pressures buyers are experiencing could be loosening up. According to research from Zillow Group, 19.4% of homes sold above their list price, as of December, the lowest share of above-list sales in almost three years. December also represented the seventh-straight month in which this rate dropped, after the share of homes selling above list reached 24% in May 2018 — the highest since the onset of the housing market recovery.
The median price above list is also declining, while the median discount below list is held steady. “This narrowing suggests buyers and sellers are syncing up on their price expectations,” said Treh Manhertz, a Zillow data analyst and author of the research. 11
The recent decline in mortgage rates contributed to strong activity for mortgage applications in the beginning weeks of the year, only to fall back slightly for the week ending February 1. The Mortgage Bankers Association (MBA) reported that its market composite index of mortgage loan application volume fell 2.5% compared to the previous week, while its purchase index declined 5.0% week-over-week.
“Despite more favorable borrowing costs, and after a three-week surge in activity, purchase applications have slowed over the past two weeks, and are now almost 2 percent lower than a year ago. However, moderating price gains and the strong job market, including evidence of faster wage growth, should help purchase growth going forward,” Joel Kan, the MBA’s associate vice president of industry surveys and forecasts, said in a press release.12
Markets: Stocks Rally Across the Globe, Lagging U.S. Sectors Gain Leadership Status
U.S. stocks put in their best monthly performance since 1987 with the broad market S&P 500 gaining 7.87%. The rebound follows one of the worst months ever for stocks in December – the S&P 500, for example, posted its worst performance since 1931.
Higher oil prices, mostly positive fourth-quarter earnings and cheap valuations compared to the lofty levels during the third quarter helped buoy stocks’ performance. Markets also rallied across the globe, even as concerns over slowing earnings and economic growth continue to be a backdrop in the current market landscape.
Global stocks were led by Canada in developed markets with a 13.02% rise based on the S&P Broad Market Index. Overall, developed markets excluding the U.S. rose by 7.33%, while emerging markets gained 7.72%. Brazil led the way with a gain of 17.48%, according to data from S&P Dow Jones Indices.
Apart from the S&P 500’s gain, the Dow Jones Industrial Average (DJIA) was up by 7.17%. The momentum investing trend that favored technology stocks and pushed the sector to leadership status last year until the fourth quarter, also caught some steam in January with the Nasdaq Composite up by 9.74%.
Yet, the S&P 500 Information Technology sector trailed the broader market, partly amid concerns over slowing growth in China, which showed up in fourth quarter earnings for a handful of leading multinationals within the sector. The Information Technology was up 6.88% after a decline of 8.54% in December.
Beaten down sectors benefitted the most in January as bargain hunters sought out value after the fourth quarter’s rout. The S&P 500 Industrial Sector Index rose by 11.36%, retracing most of its losses in December, while the energy sector was up by 11.02% following a decline of 12.82% in December. Higher oil prices helped lift the sector as West Texas Intermediate crude prices increased by 18.45% this past month following a near 40.0% tumble from early October’s high.
Although January has been a stellar month for U.S. stocks, earnings aren’t expected to be as strong as in previous quarters. Indeed, one test stocks face in the coming weeks will be how market participants factor in recent earnings revisions.
This past month has seen about a 4.0% decline in analysts’ estimates for first-quarter earnings for the S&P 500 – a pace that FactSet says is greater than five-, 10- and 15-year quarterly averages. Because of the downward revisions, the S&P 500 is now projected to report a 0.8% year-over-year decline in first quarter earnings. 13
Michael Wilson, Morgan Stanley’s chief investment officer and chief U.S. equity strategist, recently told CNBC that fourth quarter earnings growth is being “propped up” by lower taxes year-over-year, “meaning fundamental results are decelerating quickly with harder comparisons ahead.”
Recent weakness in soft data indicators in the form of business and consumer confidence are another potential risk for stocks as these readings may continue to decline from near record highs during 2018. “We remain skeptical of and thing that further weakening may be at best a governor and at worst, a drag on equities,” Wilson said. 14
Commodities: Risk Appetite Lifts Prices, Though Global Growth Fears Remain
Despite global growth concerns and risks that demand will wane, commodity prices benefited for much of January from the “risk on” appetite that has helped fuel the rebound in stocks across much of the globe. Any positive news or resolution of a trade deal between the U.S. and China is expected to further benefit commodities, particularly prices for industrial metals, which have rallied somewhat in recent weeks but where the outlook is still somewhat cloudy with slowing Chinese economic growth.
“Growing concern regarding potential weakness in the Chinese economy, lower oil prices, and a slide in investor sentiment had weighted on the price of most industrial metals at the tail end of 2018, Fiona Boal, head of commodities and real assets at S&P Dow Jones Indices, wrote in an Indexology Blog post. “But the new year brought the prospect of shrinking inventories, especially for nickel and copper, back into focus for investors.” 15
A weaker dollar and a Federal Reserve, seemingly on hold with interest rates, was a further beneficial backdrop for industrial metals as the year got underway. In general, dollar strength accompanies Federal Reserve tightening cycles and higher commodities prices with it, though the correlation doesn’t always hold.
After falling by more than 11.0% in 2018, the Bloomberg Commodity Total Return Index posted a 5.45% gain in January. For industrial metals, market observers suggest there is currently a supply deficit and any normalization of trade between the U.S. and China could drive prices higher. The S&P GSCI Industrial Metals Index rose 5.30% in January.
1 Federal Open Market Committee. (2019, January 30). Federal Reserve issues FOMC statement [Press Release]. Retrieved from: https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130a.htm
2 Federal Open Market Committee. (2019, January 30). Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization [Press Release]. Retrieved from: https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm
3 Bureau of Labor Statistics. (2019, February 1). The Employment Situation – January 2019 [Press Release]. Retrieved from: https://www.bls.gov/news.release/empsit.nr0.htm
4 Chandler, M. (2019, February 1). Short Note on Jobs Report. Marc to Market. Retrieved from: http://www.marctomarket.com/2019/02/short-note-on-jobs-report.html
5 Institute for Supply Management (2019, February 1). January 2019 Manufacturing ISM® Report On Business® [Press Release]. Retrieved from: https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?navItemNumber=31101
6 European Central Bank (2019, January 24). Press Conference Introductory Statement [Press Release]. Retrieved from: https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190124~cd3821f8f5.en.html
7 IHS Markit (2019, February 1). IHS Markit Eurozone Manufacturing PMI® – final data: Eurozone manufacturing sector moves closer to stagnation [Press Release]. Retrieved from: https://www.markiteconomics.com/Public/Home/PressRelease/7d0b5f0fc624424ab8ab8bbc9d3fdbc3
8 Caixin Insight Group (2019, February 1). Caixin China General Manufacturing PMI™: Manufacturing sector performance subdued at start of 2019 [Press Release] Retrieved from: https://www.markiteconomics.com/Public/Home/PressRelease/945f5bd422af495cb40ea9660b1553b4
9 S&P Dow Jones Indices (2019, January 29). Southwest Region Leads In Annual Gains According To S&P CoreLogic Case-Shiller Index [Press Release] Retrieved from: https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/862767_cshomeprice-release-0129.pdf?force_download=true
10 National Association of Realtors (2019, January 22). Existing-Home Sales See 6.4 Percent Drop in December [Press Release] Retrieved from: https://www.nar.realtor/newsroom/existing-home-sales-see-64-percent-drop-in-december
11 Manhertz, T. (2019, February 1). Share of Homes Selling Above List Price Plummets. Zillow Group. Retrieved from: https://www.zillow.com/research/homes-sold-above-list-price-22896/
12 Mortgage Bankers Association (2019, February 6). Mortgage Applications Decrease in Latest MBA Weekly Survey [Press Release] Retrieved from: https://www.mba.org/2019-press-releases/february/mortgage-applications-decrease-in-latest-mba-weekly-survey
13 Butters, J. (2019, February 4). S&P 500 Now Projected To Report A Year-Over-Year Decline In Earnings In Q1 2019. Earnings Insight. FactSet Research Systems Inc. Retrieved from: https://insight.factset.com/sp-500-now-projected-to-report-a-year-over-year-decline-in-earnings-in-q1-2019
14 Li, Y. (2019, January 28). Morgan Stanley says sell this January comeback: ‘Hop off now and rest up for the next rodeo’. CNBC. Retrieved from: https://www.cnbc.com/2019/01/28/morgan-stanley-says-sell-this-january-comeback–hop-off-now-and-rest-up-for-the-next-rodeo.html
15 Boal, F. (2019, February 4). Commodities Performance Highlights – January 2019. S&P Dow Jones Indices, Indexology Blog. Retrieved from: http://www.indexologyblog.com/2019/02/04/commodity-performance-highlights-january-2019/
Upcoming Select Economic Releases from Econoday, Inc. Retrieved from: https://us.econoday.com/bymonth.asp?cust=us&month=2&year=2019&lid=0
Sources for Financial Data:
Silverblatt, H. (2019, January 2). Market Attributes: U.S. Equities December 2018. S&P Dow Jones Indices Market Attributes®. Retrieved from: https://us.spindices.com/documents/commentary/market-attributes-us-equities-201812.pdf
Silverblatt, H. (2019, February 1). Market Attributes: U.S. Equities January 2019. S&P Dow Jones Indices Market Attributes®. Retrieved from: https://us.spindices.com/documents/commentary/market-attributes-us-equities-201901.pdf
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Bloomberg Commodity Index:
West Texas Intermediate Crude:
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