Mixed Data, Trade Swings, Buoyant Markets—Still No “Material” Reassessment

The last week has been turbulent concerning trade policy, with prospects for a “phase one” trade deal between the U.S. and China back to being unclear following optimistic comments from both sides earlier last week, including President Trump’s remark that they were in the “final throes” of a deal. As of now, the U.S.  is still set to impose an additional 15% tariff on roughly $150 billion of Chinese goods on December 15. This morning another front was reopened with an announcement from President Trump that he will “restore” tariffs on aluminum and steel imports from Brazil and Argentina. U.S. financial markets have not responded harshly,  however, particularly relative to earlier periods of escalation concerning trade policy. U.S. equity markets fell somewhat following today’s developments, which also included soft ISM and construction data, but remain at very high levels. In any case, we continue to see the FOMC as on hold concerning rates, with recent developments falling well short of warranting a “material” reassessment of the outlook that they have said is the hurdle for a reconsideration of their policy stance. 

Policymaker Remarks 

Brainard (11/26) gave an important speech on her views related to the framework review. She explored ways to get inflation to average 2% over the business cycle. She favored flexible inflation targeting: “Flexible  inflation averaging could bring some of the benefits of a formal average inflation targeting rule, but it would  be simpler to communicate.” As for policy tools, she talked about using interest rate ceilings at the short end of the curve if the zero lower bound becomes binding. She noted that such ceilings would also  indirectly bear on yields further out on the curve: “Yield curve ceilings would transmit additional  accommodation through the longer rates that are relevant for households and businesses in a manner that is  more continuous than quantitative asset purchases.” Larry will follow up soon with his take on the evolving views related to the framework review. 

On policy, Brainard was optimistic that next year’s GDP growth would be “modestly above potential” thanks  to “strong consumers and a healthy job market.” Nevertheless, “the balance of risks remains to the downside,  although there has been some improvement in risk sentiment in recent weeks.” She discussed the steps the  FOMC has taken so far to provide insurance and described her approach to policy going forward using  language very similar to what we’ve been hearing from her colleagues since the last meeting: As “it will take  some time for the full effect of this accommodation to work its way through” the economy, she “will be  watching the data carefully for signs of a material change to the outlook that could prompt me to reassess  the appropriate path of policy.” 

Powell (11/25) reiterated the view that “Monetary policy is now well-positioned to support a strong labor  market and return inflation decisively to our symmetric 2% objective” and that “if developments emerge that  cause a material reassessment of our outlook, we would respond accordingly.” He expressed optimism in the ability of the economy to continue to perform well: “At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and  spreading the benefits more broadly to all Americans.” Indeed, he devoted a section of his speech to the  topic, “Spreading the Benefits of Employment.” 

Kaplan (11/26) gave an interview in which he said the Dallas Fed expects 2% growth next year despite Q4  likely to be a weak quarter for growth. He thought potential growth is around 2%. In his view, “weak  manufacturing, weak global growth, weak business investment all relate to uncertainty regarding trade.” He cited the return of the yield curve to an upward slope as consistent with the mid-cycle adjustment being over  “for the time being” and reiterated the refrain that it would take a change in the outlook that is “material” for policymakers to consider adjusting the policy rate. 

Nowcasts (2019:Q4) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.3% 0.4% 0.3%
New York Fed Staff Nowcast 0.8% 0.7% 0.4%
CNBC/Moody’s Survey 1.6% 1.5% 1.5%

Recent Data 

Q3 real GDP growth was revised up to two tenths to 2.1%, but that was largely because the contribution for inventory investment was marked up. A modest 0.1% increase in real consumer spending in October is consistent with an expected moderation in consumer spending in Q4 from its 2.9% (unrevised) pace in Q3.  The personal income and outlays report for October also revealed that core PCE prices increased only 0.08%  in October. That modest print and slight downward revisions to Q3 core PCE prices resulted in the 12-month  core PCE inflation rate edging down to 1.6% in October. 

Last week’s durable goods report for October was heartening, with both orders and shipments of core capital  goods posting solid gains, easily beating expectations of modest declines. While we don’t see this as the start  of a resurgence in investment, it appears that equipment spending will return to positive—albeit modest— growth in Q4. The ISM report released this morning showed a modest further decline in December, a fourth  consecutive print below 50 highlighting that conditions in the manufacturing sector remain sluggish. The  advance goods trade data for October were another of the positive surprises in the recent data, showing a  second consecutive monthly narrowing in the goods trade deficit. This morning’s construction spending report  for October was not as poor as the 0.8% decline in total spending might suggest, as a 4.5% decline in the  home improvements category weighed on that headline figure. Notably, new private single-family residential  construction increased 1.6%, a fourth consecutive monthly gain. Private nonresidential construction remained  weak, however, declining 1.2% in October.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Advance Goods Trade Balance Oct -$66.5b -$71.0b — -$70.4b
Wholesale Inventories MoM Oct P 0.2% 0.1% — -0.4%
FHFA House Price Index MoM Sep 0.6% 0.3% — 0.2%
New Home Sales MoM Oct -0.7% 0.6% — -0.7%
Conf. Board Consumer Confidence Nov 125.5 127.0 — 125.9
GDP Annualized QoQ 3Q S 2.1% 1.9% — 1.9%
Personal Consumption QoQ 3Q S 2.9% 2.8% — 2.9%
Core PCE QoQ 3Q S 2.1% 2.2% — 2.2%
Core Capital Goods Orders MoM Oct P 1.2% -0.2% -0.5% -0.6%
Core Capital Goods Shipments MoM Oct P 0.8% -0.2% -0.8% -0.7%
Personal Income MoM Oct 0.0% 0.3% — 0.3%
Real Personal Spending MoM Oct 0.1% 0.0% — 0.2%
PCE Prices MoM Oct 0.2% 0.3% — 0.0%
PCE Prices YoY Oct 1.3% 1.4% — 1.3%
Core PCE Prices MoM Oct 0.1% 0.1% — 0.0%
Core PCE Prices YoY Oct 1.6% 1.7% — 1.7%
Pending Home Sales MoM Oct -1.7% 0.2% 1.4% 1.5%
ISM Manufacturing Nov 48.1 49.2 — 48.3
Construction Spending MoM Oct -0.8% 0.4% — 0.5%

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