When Donald Trump tweeted on New Years’ day that Americans should ‘calm down and enjoy the ride’ investors were probably alarmed about what might be in store for them in 2019.
Their alarm was probably justified after another Federal Reserve interest rate hike and a series of bad economic news from China and the US had left them reeling going into the end of 2018. In actual fact, however, the first few trading days of the year have been quite different.
In quick succession so far in 2019, there have been a number of positive factors that have helped propel markets higher at least in the first business week of the year. The first of these was US jobs growth, which recovered sharply in December after weakness in November. Nonfarm payrolls (NFP) data showed that 312,000 new jobs were added in December, far above market estimates and the second largest increase in 2018 as a whole. The report validated the fact that while manufacturing and housing data may be showing some signs of slowing, the labour market in the US remains buoyant.
Despite the strong NFP report, Fed chair Jerome Powell also gave a more cautious message about monetary policy, perhaps in an effort to calm markets vexed by the possible speed of interest rises. Mr Powell indicated that the Fed would be ‘patient’ in assessing economic conditions and that the central bank was prepared to shift policy ‘significantly’ if warranted. Equity markets soared on the back of his comments on the implication that the trajectory for rates in 2019 may not be as steep as initially feared.
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The People’s Bank of China also announced a 100 basis point cut in Required Reserve Ratio (RRR) for banks. The move is expected to free up estimated liquidity of around renminbi 800 billion and is in response to increasing downside risks for China’s economic growth. This also occurred just before trade talks resumed between the US and China, with a trade war being perhaps the most menacing risk facing financial markets this year. The tone of the talks was believed to be conciliatory and after three days they were wrapped up with apparently substantial agreements having been reached.
The minutes of the Federal Open Market Committee’s last meeting in December - released last week - also showed a dovish tone, reinforcing the message of Mr Powell’s earlier commentary. As per the meeting minutes, future rate hikes are not on a preset trajectory but are going to be very much data dependent. And conveniently when US data did appear - in a government shutdown affected week - it very much played to the argument for a pause in the rate hike cycle, with US Consumer Price Index data in December holding steady.
Other positives were also to be found in this region where oil markets rebounded through the week, to arrest the declines of late last year, while sterling even managed to recover on hopes that the UK might seek to delay its exit from the EU if Theresa May loses the vote on her Brexit plan in the coming week.
All told the week was remarkable for the consistency of the good news on offer, from all sides of the world for once. However, whether it can be sustained remains to be seen, as clarity is still lacking on all of those issues that gave rise to these glimmers of hope. The full details of the trade talks are still awaited, with the US saying that they will decide on next steps after the official report has been discussed back in Washington. And in terms of US monetary policy, markets will remain effectively in the dark about the state of the economy and the likely direction of interest rates until the government shutdown comes to an end. The fact that investors are drawing reassurance from an absence of data caused by a government closure might be of some concern in itself.
Finally the optimism that was seen last week might also be a source of its own undoing. While December’s market meltdown may have been responsible for Mr Powell changing his tune on monetary policy, how long will it be before improving sentiment causes the Fed to start talking up interest rates once again? Then investors will surely begin to ‘enjoy the ride’.
Tim Fox is chief economist and head of research at Emirates NBD