Despite 2019 beginning with longest government shutdown in US history, a no-deal Brexit becoming more likely, and data continuing to indicate weaker growth outside the US, equity markets rallied strongly in most regions. Emerging markets and Asia posted the strongest returns and the US outperformed the developed world, posting its best monthly return in more than three years.
The sharp reversal in sentiment occurred as Federal Reserve officials set a significantly more cautious tone, indicating that the central bank might be about to end its rate hiking cycle. This was enough to overshadow the plethora of ongoing investor concerns. The flow of dovish tones began at an American Economic Association panel with Chairman Jay Powell and former Chairs Yellen and Bernanke on 4th of January. Just prior, the jobs report had smashed expectations for December with 312,000 new jobs added to the economy versus 184,000 expected. The unemployment rate edged up as more workers joined the labour force and wage growth rose to 3.2% annually.
So, it was in this context that Powell said the Fed would be “patient” with inflation remaining muted and to see how the economy evolves. As further consolation, Powell said he was “listening carefully to markets” who are clearly signalling risks to the outlook such as China slowing, trade disputes, policy uncertainty in Washington and “other factors”. Three other voting FOMC members, Evans, Rosengren and Bullard added volume to this message. While Bullard has always been dovish, Evans and Rosengren clearly shifted their stance. Again, they pointed to low inflation and heightened risks to the global economy providing space for the Fed to take a wait-and-see approach. Market implied probabilities of rate hikes in 2019 fell from 2.5 hikes in December to 1.5 hikes in January and the chances of a rate cut in January 2020 rose.
In terms of hard data, the ISM Manufacturing Survey fell sharply in December and was well below expectations. While manufacturing remains strongly in expansion, the report indicated risks to that growth. Comparable indicators in Europe indicated the slowest growth in four years during December. The yellow jacket movement in France reportedly led to the first fall in economic growth in 2.5 years while Germany, a bell-weather for global growth, had the weakest expansion in 5.5 years. Chinese data remained subdued, highlighted by Apple reporting slowing sales, but mid-month markets welcomed the PBOC injection of a record stimulus, RMB570bn ($84bn) into the banking system.
Anna Haugaard, CFA
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