As we approach the holidays and markets start to quiet down (at least in theory), it’s time to look back and consider some of the recurring themes from the seemingly isolated events of the past year. We’ve written several pieces on growth, fiscal and monetary stimulus, manufacturing, and most importantly inflation. 1 1 Close We also changed the formatting – the emails from the beginning of the year now look like they are from the 1980s. In the spirit of the New Year and bringing some of the themes together, we imagined what various market participants’ New Year’s resolutions may have been at the beginning of the year and how they played out. 2 2 Close We of course don’t know what anyone resolved, but that won’t stop us from guessing.
1. Inflation Forecasters: Finally be right on calls for higher inflation.
After ten years of economic growth, inflation remains low in most of the world. This has puzzled economists whose models keep saying it should rise and led to some very wrong forecasts. 3 3 Close We have found the only way to avoid being wrong in our forecasts here at the Wrap-Up: we don’t make any. It has also driven many of the market moves we’ve seen this year. Low inflation in the U.S. enabled the Fed to cut rates despite low unemployment and moderate growth. This paved the way for the rally in both stocks and bonds. Once again, many forecasters are calling for higher inflation. 4 4 Close The median consensus Bloomberg economist survey forecast for core PCE in 2020 is 1.9% YoY, an increase from the end of 2019 forecast of 1.6% YoY. Source: Bloomberg. As of December 19, 2019. We may be writing the same thing about the forecasts next year.
2. The Fed: Confuse everyone by changing our reaction function repeatedly.
A famous economist supposedly said “when the facts change, I change my mind. What do you do?” In the past year, the facts didn’t change nearly as much as the Fed did. For most of 2018, the Fed was considering how far it needed to hike to get rates to a normal level. As 2019 progressed, the governors went from telling us that they will hike until something breaks to something akin to “we better cut before something breaks.” Now at the end of the year, their resolution seems to be “let’s be careful and not do anything or we’ll break something.”
3. Trade Negotiators: Scare as many investors as possible.
The trade war has been a Shakespearean drama. Markets have followed every move by both sides. The reaction by stocks can be best described as “fight bad, rapprochement good.” At one point, it seemed like markets might stop caring. They didn’t. Because the behavior of the players involved has been unpredictable, short-term market moves have also been unpredictable. However, there have been few lasting effects on markets, and the year is ending on a relatively positive note with what looks like a “Phase One” deal.
4. Policymakers: Stop worrying about budget deficits.
Fiscal stimulus is the new monetary easing. Policymakers continued their shift from fiscal responsibility to fiscal stimulus in 2019. Central banks, which had once extolled the virtues of balanced budgets, are now literally passing the buck to governments to provide counter-cyclical policy. Populist parties from both sides of the political spectrum seem to like budget deficits. 5 5 Close You could also make the case that many of the populist governments were less populist than we had thought. The left wants more social spending, while the right wants lower taxes. We seem to be getting both. There are still a few holdouts, such as Germany, but more countries are willing to spend and borrow. Because inflation is low, markets seem to like it.
5. Manufacturers: Not produce as much as economists expect.
In Germany, China, and more recently the U.S., manufacturing numbers have disappointed. You see it in purchasing managers indexes and in industrial production numbers. A substantial portion of the weakness has been in autos and related industries, and it has been a drag on global growth. Countries with significant exposure to manufacturing have tended to underperform economically. Fortunately, services and consumption have been solid. 6 6 Close U.S. Census Bureau. There are some hints that the trends in manufacturing may be starting to reverse.
6. Economic Forecasters: Make lots of warnings.
Throughout the year, doomsayers pointed to various indicators showing impending recession. These included the yield curve inversion, anomalies in credit markets, high leverage among corporates, and who knows what else. While some economies around the world showed vulnerability, growth remained positive if moderate in most countries. Underlying economic indicators remain solid, and policymakers are providing more than ample stimulus. Fewer forecasters are predicting a recession in 2020. 7 7 Close Wall Street Journal: “U.S. Expansion Expected to Continue Through 2020 – WSJ Survey,” 12/18/19.
7. Macro Wrap-Up Writer: Stop talking about Brexit.
We make this resolution every year and have broken it every year. This year we made it to April. 8 8 Close Yes, yes I know it’s progressing. Also, I can’t believe I made a GoT reference this year. That reference has not aged well.
In addition to covering these themes, we also wrote some truly one-off Wrap-Ups about FX intervention, the repo market, silver, differing earnings measures, mortgage hedgers and for some reason Australia and Canada.
There were also several which I don’t remember writing. Or don’t want to admit that I do.
We hope you’ve found these useful. We’re resolving to take two weeks off and be back January 10th. Happy New Year!
What We Are Watching
U.S. Durable Goods Orders (Monday, December 23rd)
Manufacturing in the U.S. has shown clear signs of deceleration over 2019. Slower global growth, trade uncertainty, weaker global auto sales, a strike at a large domestic auto producer and safety concerns around a large domestic airplane manufacturer have all likely contributed to the weakness. November data on U.S. durable goods orders and shipments is expected to benefit from the resolution of the auto strike. More broadly, the data will provide an update on the state of business investment and the reaction of firms to the more positive tone of the U.S.-China trade dispute in the past few months. In the October release, core capital goods shipments rose more rapidly than expected, posting the strongest monthly gain since January. However, the increase came after three consecutive months of declines, which pointed to a meaningful dip in capex activity. A positive surprise in next week’s data would be encouraging, and might provide support to U.S. stocks, the dollar, and Treasury yields.
China Manufacturing PMIs (Tuesday, December 31st and Thursday, January 2nd)
Investors appear to be taking a glass-half-full view of global growth data these days, responding to potential progress in trade negotiations and signs of incremental improvement in some high-profile economic releases. The most recent round of data from China has looked particularly encouraging, with improvement in both the CFLP and Markit Manufacturing PMIs as well as stronger-than-expected growth in industrial production and retail sales. If the December round of Manufacturing PMIs show continued acceleration, it would likely increase investor confidence that the Chinese economy is recovering after a disappointing 2019. This could provide a boost to domestic and global equities and could put upward pressure on commodity prices and bond yields.
U.S. ISM Manufacturing PMI (Friday, January 3rd)
As discussed above, weakness in the manufacturing sector has been a major source of concern in the U.S. and other economies. Recently, tentative signs that activity is bottoming out have contributed to a more optimistic outlook for 2020. The ISM Manufacturing PMI, among the most widely-followed U.S. datapoints due to its simplicity and long history, remained below the “breakeven” level of 50 in November, indicating that survey responses were negative on net. The Markit Manufacturing PMI, a more recently launched alternative gauge of industrial growth, never fell below 50 and has been improving since August. 10 10 Close Institute for Supply Management and Markit. Any increase in the December ISM Manufacturing data towards the more positive trend in the Markit series would support expectations of improving manufacturing activity in 2020. Such a result would be positive for risk sentiment as the New Year begins.