Powell Delivers a Subtle Message to Markets

(…) In describing those crosscurrents, the first thing Powell highlighted was how “financial markets became more volatile” at the end of last year and how “financial conditions are now less supportive of growth.” He then talked about economic fundamentals and how “growth has slowed in some major foreign economies, particularly China and Europe.” Mentioning financial markets before the economy is as clear a signal as any that the Fed’s top priority is preventing another plunge in the stock market like the one in December, which many suspected was the real reason the Fed officially pivoted toward a more dovish stance in January. (…)

Nevertheless, the bond market is signaling that there’s a very high bar to any rate increases this year by the Fed. That was confirmed in JPMorgan’s widely followed weekly Treasury sentiment survey. It revealed that bond traders are now their most bullish since 2016 despite yields on U.S. debt falling to about their lowest levels of the last year and the government ramping up its borrowing to finance a $1 trillion budget deficit. As if that wasn’t enough, the Treasury Department’s monthly auction of seven-year notes drew the most demand since August, based on the amount of bids the government received relative to the amount sold. Institutional purchasers that deal directly with the Treasury took more than 25 percent of Tuesday’s $32 billion seven-year offering, the most since 2014. “Auction trades like supply is running out,” was the headline of a research note put out by FTN Financial in the wake of the sale. Supply, of course, is not running out. It’s getting more abundant. The ballooning budget deficit caused the U.S. to more than double its borrowing last year to $1.34 trillion, and predictions are that annual new issuance will range from $1.25 trillion to $1.4 trillion over the next four years. The bond vigilantes may someday regroup and push back against excessive borrowing, but there’s no sign of it now. (…)

The Obama-Trump Economic Boom The current expansion may soon be America’s longest, and neither inflation nor tariffs are likely to stop it.

Alan S. Blinder, professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve, has good points relative to the longevity of the cycle:

(…) Readers of these pages know that I’ve been critical of the president. But it must be said that his economic policies have been the shining stars in a dismal policy firmament. Like most liberal economists, I did not like the way he structured his tax cuts. And like many economists of all stripes, I thought the tax cuts might overheat an already-hot economy. But the latter worry appears to have been wrong, at least so far. The tax cuts seem to have boosted growth without exciting inflation. (…)

The economic storm clouds don’t look very threatening at the moment. (The political ones are another matter. More on that shortly.) (…)

That the Fed didn’t raise interest rates in January, even with the federal-funds rate barely above inflation, suggests that Jerome Powell may be an even more dovish Fed chair than Janet Yellen. It sure doesn’t look as if an overzealous Fed will squelch the expansion.

Another common expansion killer, though not lately, is a spike in the price of oil. Predicting the price of oil is a fool’s errand, and I won’t try. But a jump to, say, $90 or $100 a barrel doesn’t look likely any time soon. (…)

Exports to China are only about 1% of U.S. gross domestic product. Even if they fell by half—well, you can do the math. America’s total exports to all countries are vastly larger. But lately, our bellicose president doesn’t sound inclined to declare trade war on Canada. Let’s hope it stays that way. (…)

Last but certainly not least, expansions are sometimes killed by sudden drops in either consumer or business confidence—or rather by the declines in spending that such drops engender. Might that happen in the next few months? I suppose so, but recent economic data don’t point in that direction.

Recent political “data” are a different matter. It is certainly possible that the U.S. will find itself in a full-fledged constitutional crisis in the coming months, precipitated by, say, the “national emergency” over immigration. What then? If business managers and market traders behave like Mr. Trump’s base, they’ll shrug it off: Constitution, shmonstitution. But if threats to democracy shake confidence, look out.

A low probability, you say? I agree. My bet is that the current expansion will sail through June, setting a new record. The names Obama and Trump will therefore be linked forevermore in economic history—possibly to the chagrin of both men.

U.S. Housing Starts Falter in December; Permits Hold Steady

Total housing starts dropped 11.2% (-10.9% year-on-year) during December to a 1.078 million annual rate (AR), its lowest level in 27 months (this report was delayed as a result of the government shutdown). December starts were substantially weaker than the 1.252 million expected by the Action Economics Forecast Survey. Moreover, starts for October and November were revised down by a total of 50,000.

Both single family -6.7% (-10.5% y/y) and multifamily -20.4% (-11.8% y/y) were hit hard in December. Starts fell in every region of the country except the Northeast where they were unchanged (+21.6% y/y). In the West, starts plummeted 26.3% (-39.7% y/y); in the Midwest they dropped 13.2% (-26.5% y/y); while in the South they were down 6.0% (+6.1% y/y). In the Midwest and West housing starts were at their lowest level since early 2015.

Building permits edged up 0.3% (0.5% y/y) to 1.326 million in December after a slightly-downwardly revised 4.5% gain in November. A 2.2% decline in single-family permits (-5.5% y/y) was offset by the 4.9% rise in multi-family (12.2% y/y). (…)

U.S. Consumer Confidence Rebounds

The Conference Board Consumer Confidence Index jumped a great-than-expected 8.0% to 131.4 in February (1.1% year-on-year) reversing January’s decline. Still, confidence has fallen 6.5 points from the cycle high touched in October 2018. The Action Economics Forecast Survey expected a reading of 124.8. During the past ten years, there has been a 67% correlation between the level of consumer confidence and the year-on-year change in monthly real consumer spending.

As per January, the expectation component drove the shift in confidence, jumping 15.7% (-5.3% y/y) in February. Meanwhile, views of the present situation continue to improve, up 1.9% (7.6% y/y) to a cycle high 173.5. The labor market differential, representing the difference between respondents indicating jobs are plentiful and those saying jobs are hard to get, also rose to a cycle high 34.3. This series has a 97% correlation with the unemployment rate over the last ten years.

OPEC Curbs Will Continue Despite Trump Pressure Says Saudi Oil Minister OPEC will likely keep cutting its production in the second half of this year, Saudi Arabia’s oil minister said, defying pressure from the Trump administration to dampen oil prices.

Canada threatens not to ratify USMCA until U.S. ends steel, aluminum tariffs The move is designed to use Canada’s last opportunity to leverage the new United States-Mexico-Canada Agreement to put pressure on the White House into ending the duties

‘There’s No Money Right Now’: China’s Building Boom Hits a Great Wall of Debt A county in China’s deep south went on a borrowing binge to fund development. Several unfinished projects later, investors want their money back.

(…) The proliferation of private funds and other money-raising channels for local governments makes it difficult for economists and for Beijing to track the total amount of borrowings. Official figures pegged the sum of local and central government debt at 29.95 trillion yuan ($4.457 trillion) in 2017, roughly 36% of the economy. (…)

TREAT YOURSELF

Masters in Business Live, with Howard Marks of Oaktree Capital