Following up the strongest week of the year in U.S. equity markets proved difficult with a push and pull equity market finishing down by the end of Friday’s trading. Bonds rallied sharply as rates fell on slowing global growth concerns. We are in the quiet period leading up to 1Q earnings season so there was a lack of fundamental data but there were ample policy, political, and technical data points to garner market attention. A Fed meeting, high profile Brexit developments, the completion of the Mueller report, a closely watched yield curve indicator, and some U.S.-China trade tensions (for good measure) were the key highlights on the week.
- Wednesday’s FOMC meeting was dovish by any measure. They kept rates steady at 2.375%, projected no more rate hikes in 2019, reduced their 2019 growth forecast (2.1%), and announced a tapering of the balance sheet normalization program with a conclusion by September - much sooner than anticipated.
- The pace of Chairman Powell’s pivot from a hawk last October to an outright dove in March has been remarkable. Fed funds futures markets have taken it further, now pricing in over 50% odds of a rate CUT in 2019.
- If the Fed’s zero rate hike forecast for 2019 and 1 in 2020 materializes, it would tie for the second longest Fed pause since 1990. Fed pause periods have been constructive for the stock market.
- The 2yr/10yr slope hit a cycle low and the 3m/10yr yield curve inverted for the first time in over 3000 days on Friday, capping the longest stretch without a yield curve inversion since 1962.
- While it’s true that every recession since 1962 has been preceded by a yield curve inversion, not every yield curve inversion has been followed by a recession. Whether and how long the curve remains inverted will be closely watched.
- Bespoke referenced the surprising % positive and % return averages for the S&P 500 following curve inversions following long (500+ days) periods of positive slope. An inversion of this type does not necessarily translate to subpar performance immediately following.
- Substantial Brexit developments last week have temporarily averted the 3/29 deadline. The conditional extension is if Parliament approves a withdrawal agreement next week the deadline to enact necessary legislation is extended to May 22. If not, an April 12 deadline takes effect.
- The Strategas Monetary Tightness Measure is 60bps easier on the year, 20bps easier since the end of February, and overall 135bps lower than neutral.
- An interesting note from the Chart Store is that the Fed balance sheet increase from $4.7b to $50b (10.6x) through the depression and WWII makes the 2008-2015 increase from $910b to $4.5t (4.9x) look small time. That said, ‘normalization’ post WWII was much more gradual than this time and today’s Fed seems much less patient than the 1950’s.
- Demographics, falling interest rates, strong technicals, and the robust job market are providing further support to our constructive view on the housing sector.
- Lighthizer and Mnuchin are traveling to China this week and another encouraging note was Chief Economic Advisor Larry Kudlow announced a tentative agreement with China regarding an enforcement mechanism.
Economic Release Highlights
- Both U.S. (54.3c/52.5m/54.8s) and EZ (51.3c/47.6m/52.7s) flash PMIs confirmed the global slowdown ensuring nobody will likely be second guessing the dovish Fed last week. German manufacturing PMI stayed below 50 for a third consecutive month.
- Factory Orders slowed into year-end and did not bounce in January, up only 0.1%. Ex-transportation was -0.2% following Nov/Dec of -1.3% and -0.5% respectively, likely catching the attention of Fed policy makers.
- February Existing Home Sales surged 11.8%m/m, easing some of the pessimism surrounding the sector and the NAHB housing market index bounced further off its December bottom