Weekly Update: Still Living in a Material World

Incoming U.S. data continued to signal a strong economy but tepid inflation (see analysis below). There  were also developments on various sources of political uncertainty: 

• On Brexit, a majority of U.K. MPs backed Prime Minister Johnson’s plan to leave the E.U. on  January 31, 2020. 

• On USMCA, the U.S House of Representatives approved the trade deal by an overwhelming margin.  This vote allows the Senate to ratify the agreement in early 2020. 

• Following the announcement that Phase One of the U.S.-China trade deal was completed, both sides revealed that Trump and Xi spoke via telephone about the bilateral relationship concerning both trade and politics. It was also reported that Xi will not attend Davos, dashing hopes for a  signing ceremony of Phase One at that time. 

• President Trump was impeached by the U.S. House of Representatives. But he will likely be supported by the U.S. Senate. 

Policymakers’ Remarks 

FOMC participants continued to reiterate that it would take a “material” adjustment to the outlook to make them consider changes to the fed funds rate path. A number of them explicitly projected no rate moves in  2020. 

• Bullard (12/19) “penciled in” no hikes in 2020 and cited the “fairly big” cumulative easing in 2019  should make them wait and see. 

• Williams (12/18) thought “monetary policy is accommodative, it is supporting growth.” He said he’d be fine with further decreases in U-3. 

• Evans (12/18) was “comfortable” with the SEP medians of no moves in 2020 and one hike each in  2021 and 2022. He did not project any need for easing: “I don’t anticipate more risk management  being needed from the level that we’re at.” To him, the current fund’s rate is “something that can  serve us really quite well.” 

• Barkin (12/18) thought policy is “still accommodative, but that might be a pretty good posture in a  world where uncertainty has been high.” He was hopeful that resolution of uncertainty from Brexit,  USMCA, and U.S-China trade could ease business uncertainty. Williams (12/18) echoed a similar view  but added: “there’s still some significant risk to the downside.” 

• Kaplan (12/17) also shared the “material” guidance. On the balance of risks, he offered that “whereas  I thought earlier in the year risks were to the downside, I’d say they’re more balanced.” • Rosengren (12/17), who opposed all three cuts in 2019, said “I do have concerns about that financial stability. I would prefer probably a different level of rates.” He also linked recession risk with asset  prices: “If what you want to do is avoid recessions in the future, you have to be thinking about what  is happening to asset prices as well.” Nonetheless, he reiterated the FOMC’s “material” guidance and  added “This is a good time to patiently assess the economy,” and “in the short run, I do not see a  need for additional policy easing unless there is a material change to the forecast.” 

A few were explicitly concerned about the underperformance of inflation: Evans was “personally worried that  inflation has been too low.” He added, “If we got up to 2.5% I think that would further reinforce a view that our objective is in fact symmetric… We must overshoot at this point in the economic cycle.”  Given the undershooting of inflation, he “can’t see a reason why we would need more restrictive policies.” 

There was also some encouraging news with money market stress and the Fed’s response (repos and T-bill purchases). The year-end term repo on Thursday was undersubscribed, offering some hope that the Fed’s extra liquidity measures over year-end will be successful in tamping down stresses. 

• Williams praised the Fed’s response, calling their measures “highly effective.” He thought “markets  are functioning well with ample reserves.” 

• Kaplan suggested that the Fed should scrutinize any guidance that makes banks prefer holding  reserves over Treasuries: “I think looking at some of these tests, especially vis-a-vis Treasuries and  reserves, I think some of that, looking at that, would be a healthy thing.” He called for serious consideration of a standing repo facility. 

Nowcasts (2019:Q4) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.1% 2.0% 2.0%
New York Fed Staff Nowcast 1.3% 0.7% 0.6%
CNBC/Moody’s Survey 1.9% 1.8% 1.8%

Recent Data 

Generally, the data continued to signal a solid U.S. economy. The third estimate of Q3 GDP remained at  2.1%, with an upward revision to consumption offset by a drag from inventory investment. But inflation continued to undershoot the Fed’s objective, with November’s core PCE inflation (12-month basis) printing at  1.6%, which already exceeded expectations slightly. Headline PCE inflation was at 1.5%. The Michigan 5- 

10 year inflation expectations measure slipped further, edging down to 2.2%, which is the first time it has  been so low.

Release Period Actual Consensus Revision to Previous Release Previously Released Figure
Housing Starts MoM Nov 3.20% 2.40% 4.50% 3.80%
Industrial Production MoM Nov 1.10% 0.90% -0.90% -0.80%
Manufacturing (SIC) Production Nov 1.10% 0.80% -0.70% -0.60%
Capacity Utilization Nov 77.30% 77.40% 76.60% 76.70%
Existing Home Sales MoM Nov -1.70% -0.40% 1.50% 1.90%
GDP Annualized QoQ 3Q T 2.10% 2.10% — 2.10%
Personal Consumption 3Q T 3.20% 2.90% — 2.90%
GDP Price Index 3Q T 1.80% 1.80% — 1.80%
Core PCE QoQ 3Q T 2.10% 2.10% — 2.10%
Personal Income Nov 0.50% 0.30% 0.10% 0.00%
Personal Spending Nov 0.40% 0.40% — 0.30%
Real Personal Spending Nov 0.30% 0.20% — 0.10%
PCE Deflator MoM Nov 0.20% 0.20% — 0.20%
PCE Deflator YoY Nov 1.50% 1.40% 1.40% 1.30%
PCE Core Deflator MoM Nov 0.10% 0.10% — 0.10%
PCE Core Deflator YoY Nov 1.60% 1.50% 1.70% 1.60%
U. of Mich. Sentiment Dec F 99.3 99.2 — 99.2
U. of Mich. 5-10 Yr Inflation Dec F 2.20% — — 2.30%

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