Rates – Fed Funds

We expect the Federal Reserve to cut rates this week by 0.25% — the first cut since 2007. Last week, the European Central Bank signaled a willingness to cut rates and buy assets. Both banks are responding to signs of slower global growth and weakening trade. These actions would mark a turnaround in messaging from a year ago. At that time, most were expecting global rates to move higher as growth kept on an upward path. A Fine Line The central banks must walk a fine line between voicing a worrying message about growth and providing “insurance” against a potential…

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When Patience is a Virtue Patience is a virtue when it leads to good judgement. Last week, this kind of patience was on full display as Federal Reserve Chairman, Jerome Powell, delivered a dovish outlook on monetary policy. The more hawkish message of last summer and early fall is now gone, and rightly so given trends in the data since then. Specifically, a sharp spike in market volatility last fall, and clear signs of slowing global growth, has led to this moment. Ongoing Chinese trade and Brexit negotiations also compelled the change in attitude. We are happy to see the…

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Viewpoint 2019

Against a backdrop of worry over trade and rising interest rates, the United States economy continues to perform well. While equity markets generally declined in 2018, investors in the United States generally fared better than overseas. Moreover, most companies saw revenue, profits, and dividends grow in 2018, and we expect more to come in 2019. This annual Viewpoint, along with quarterly updates, provides an organized way of looking at the economy, financial markets, and your portfolio. The full report is available by clicking the link below.

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Ten Years After Looking back over the past ten years, the U.S. economy and stock market emerged as unlikely winners. A decade ago, Lehman Brothers and dozens of other financial firms were in the midst of collapse. In short order, the financial system and economy entered into a very dark period, culminating in a deep and painful recession. Equity markets fell by over 50% and 8.7 million Americans lost their jobs as the unemployment rate soared to 10%. From those depths, a recovery took hold and led to an expansion which endures today. Employment rolls are again full, as 20…

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THE WEEK AHEAD President Trump delivers State of the Union Tuesday; Federal Open Market Committee (FOMC) decision Wednesday (no change expected); Manufacturing and Employment data should be strong. MACROECONOMIC INSIGHT There is plenty of good feeling about growth these days. Recently, the International Monetary Fund bumped their ’18-19 world growth forecast 0.2% to 3.9%. This is higher than our assumption of 3.4% growth. Domestic growth forecasts are also strong. The Federal Reserve Banks of Atlanta and New York see first quarter real U.S. growth at 3.4% and 3.1%, respectively. These are some of the best growth numbers we’ve seen this…

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THE WEEK AHEAD A busy week of negotiations and analysis of tax policy this week, ahead of the Christmas holiday.   MACROECONOMIC INSIGHT Congress will not be avoiding the Christmas rush this year, and a vote on a compromise bill is expected this week. A cut in the corporate tax to 21 percent from 35 percent is significant, and improves the after-tax earnings outlook. A reduced top individual income-tax rate, to 37 percent from 39.6 percent, should bolster private demand and savings. Progress on the tax front is important given the nearly $5 trillion increase in U.S. market value this…

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THE WEEK AHEAD The FOMC meets this week and is expected to deliver a rate increase. Wednesday’s announcement will be associated with a summary of economic projections and a press conference by the Chair. MACRO VIEW The return on cash hasn’t been much to write home about recently. As the economy picks up, expectations for short-term interest rates are perking up (graph below). A year ago, markets were pricing in an expectation for a 1.2% short-term interest rate by early 2019. Today, that same expectation is near 1.9%. As assumed cash returns rise, they compete against returns available on other…

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This week’s data includes a look at consumer prices and industrial production on Tuesday.  Each is relevant given recent below trend growth in fundamental data. MACRO VIEW Headline consumer prices (CPI) in the last year were pressured by a sharp decline in the energy component of the index.  Stripping out energy (and food), core underlying inflation trends appears stronger (second chart, below).  The core inflation numbers tend to be the ones emphasized most by policy makers, however.  The rise in current core inflation trends stand at odds with overall inflation and future expectations for falling headline inflation (bottom chart, below)….

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Weekly Comment

Productivity growth averaged 3% through the 1950s and 1960s, declined to 2% from the mid-1970s through 2007, slid to just over 1% since the 2008-2009 recession, and fell to under 0.5% last year.  We are at serious risk of stagnating growth, should this trend continue.  In such an environment, tactical approaches will be required as long-run returns would tend to diminish with real growth rates.  Currently, we see recession risk above historic averages, given generally weakening global data.  This slippage in fundamentals that became more evident in late 2015 contributed to our elevated focus on quality in equity portfolios and…

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WCA Weekly Update

Light economic data from the United States expected this week, and the European Central Bank (ECB) is expected to deliver additional monetary stimulus.  China releases February’s Merchandise Trade Balance, Consumer Price Index, and Producer Price Index while Japan and the EU both release their latest GDP prints. MACRO VIEW We are looking for signs of an upturn in the data when we update our WCA Fundamental Conditions barometer and forecasts next week.  For now, we view the recent stabilization in commodities and better tone in the stock market as providing some reason for optimism, but we need further evidence that…

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MACRO VIEW We are not in a recession, but we are seeing data that is uncharacteristically weak for an expansion. The last quarterly GDP report showed 0.7% annualized growth for the latest quarter with real GDP up just 1.8% over the year prior (below). This growth is too weak for comfort as it leaves the economy more exposed to a potential recession in the event of a unforeseen shock. Headline inflation of 0.4% is still well below the Federal Reserve’s (Fed’s) target and core personal consumption expenditure prices are up just 1.2% through December compared to a year earlier. January’s…

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Our macro outlook is for slow growth and stubbornly low inflation. The start of policy normalization following years of zero interest rate policy in the United States comes at a time of weakening global growth and mixed signals from the domestic economy. We continue to view the United States economy as best positioned to weather the overall weak global environment that resurfaced in 2015. In this report, we take a long-term view and address expectations for markets over the long run. Full Report Click Here  

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