While we won’t get December retail sales numbers today due to the government shutdown, we did get December PPI numbers yesterday and they only add to the sense that inflation remains muted and will allow the Fed to pause rate hikes in early 2019. In fact, former Chair Janet Yellen speaking to the National Retail Federation yesterday said that if the global slowdown deepens we may have already seen the last rate hike of this cycle. And that’s not all. Kansas City Fed President Esther George, the FOMC’s most hawkish member, said “it might be a good time to pause the Fed rate normalization.” It’s pretty clear now the Fed sees their December optimism over the economy and future rate hikes as misplaced. It’s anyone’s guess at this point if the December rate hike was the last of this cycle but it’s pretty clear it will be the last hike for awhile. And if they’re willing to pause in March it seems things would have to rebound quickly for hikes to resume in June. With political gridlock, trade negotiations, the Brexit stalemate and general economic anxiety abounding in early 2019 that doesn’t seem to be a good bet at this time.
|Economic News||Empire Manufacturing Hits a Near Two-Year Low||Agency Indications|
We were supposed to grace you today with a review of retail sales for December but with the government shutdown entering Day 26, that report and others have been delayed. In essence, we’re starting to fly blind in regards to economic performance and that’s not a good place to be what with all manner of obstacles standing dead ahead for the economy. The shutdown is also starting to cause a noticeable hit to first quarter GDP. It’s now estimated that every week of the shutdown shaves nearly 0.1% off GDP. With nearly four weeks in, the cumulative cost of the shutdown could be approaching 0.4%. Estimates for first quarter GDP are being trimmed with the Bloomberg consensus now at 2.2% with a rebound to 2.4% in the second quarter which assumes the shutdown is resolved and missed payrolls paid, and the pent-up demand expended in the second quarter.
The breaking point of the shutdown could come from the airline sector as security wait times continue to climb as more and more TSA agents call-in sick. If a second pay period goes unpaid expect more to begin not only calling in sick but also looking elsewhere for employment, and those suddenly vacant positions won’t be quickly refilled. In fact, there have been rumors that TSA employees could walk away en masse and that would certainly force political hands. For now, we watch and wait, finding solace in the fact we’re not flying anywhere anytime soon as it looks to be a most unpleasant experience right now.
One of the obstacles for the economy we mentioned above is the Brexit vote in the U.K. that didn’t go well for Prime Minister Theresa May yesterday. Parliament voted down the plan 202-432 she negotiated with Brussels to leave the E.U. The historically wide margin of defeat will be followed by a confidence vote of the May government today. With a March 29th deadline looming, and no plan approved by Parliament it looks like the obvious move will be to delay the March deadline, perhaps to July and work to arrive at a revised plan agreeable in the U.K. Parliament and in Brussels. In summary, it looks like the issue will continue to fester for several more months.
The non-agreement on Brexit only complicates the economic outlook in the U.K. and on the Continent. In Germany, the first estimate of full-year GDP was a modest 1.5%, the weakest since 2013 and compares to 2.2% in 2017. The German Federal Statistics Office mentioned that fourth quarter results, while not officially available, did not print negative which is a relief after the third quarter’s –0.2% result and thus the largest economy in Europe looks to have narrowly avoided a technical recession.
Back in the U.S., when Fed Chair Jay Powell was joined on stage in Atlanta by former Fed Chairs Janet Yellen and Ben Bernanke recently there was a collegial spirit and somewhat unanimity of opinion on the current state of policy. Fast forward one week and now Yellen has added her voice to the pause crowd. In fact, she pondered that it is possible that the Federal Reserve may be done raising short-term interest rates, though she did offer that another couple of rate hikes may still be in the cards. Speaking before the National Retail Federation’s trade event in New York City the former Fed chair said, "If there is a downturn in the global economy and it spills over into the United States, we could've seen the last interest rate increase in this cycle. That's a possibility." On the other hand, if the Fed did opt for further tightening she said it will likely hold off for some time adding, "I think at this point, the Fed will take a breather, evaluate where the economy is."
Her comments add to the growing speculation that the central bank may have wrapped up its tightening cycle. If that is the case, we’re left to ponder is this like 2016 where the Fed paused for most of the year after a December 2015 rate hike? That year saw the 10-year dip nearly 100bps in the first half of the year with the 10-year hitting an all-time low of 1.36% in July. That rally, however, was reversed in the second half of the year as economic numbers improved and the November election spurred a final risk-on rally that saw the 10-year Treasury yield move back to the 2.50’s%.
We don’t have national elections this year to spur a risk-on move and this summer will make this expansion the longest in history. With trade talks and political dysfunction looking like long-lasting headwinds, we foresee a resumption of rate hikes as a much tougher task this time around, and that is likely to keep rates range bound with a bull steepening possible.
Empire Manufacturing Hits a Near Two-Year Low
The latest Empire Manufacturing Survey has offered fresh evidence of a further decline in business sentiment. January's 3.9 print was the lowest since May 2017 and within the details, new orders slipped to 3.5 from 13.4 in a troubling development to be sure. The decline in January follows a disappointing result in December. In fact, the decline in new orders over the past two months has been the sharpest in nearly two years. Other internals were almost uniformly lower and that belies near-term hopes that capital expenditures will increase in 2019 and help carry the economy as the consumer is expected to take a breather.
Agency Indications — FNMA / FHLMC Callable Rates