The Fed: Timing is Everything
The Fed raised its benchmark rate, along with financial markets' anxiety; U.S. headline growth for Q3 looked just OK, but the devil lurked in the details.
[We’re not] "sitting there saying we know for sure what's going to happen" [in 2019]
Federal Reserve Bank of New York President John Williams
The Fed: Timing is everything
The FOMC’s December 19th rate decision and economic forecasts were broadly in line with expectations of a 25 basis point (bp) hike and a downward revision of forward forecasts. But rapidly growing worries about growth in the month since its November meeting meant that the Fed’s slightly dovish tilt from its previous stance was seen by many as inadequate.
Among the clearest signals of the downdraft in growth expectations: yields of U.S. Treasuries. 30-year bonds, which had drifted downward all week, plunged below the psychologically important level of 3.0% about 25 minutes into Chair Powell’s post-meeting press conference. It then dipped as low as 2.956% the following day before rebounding somewhat to 3.015% by mid-morning December 21.[1] The 30-year Treasury bond is widely accepted as a barometer of expectations about long-term growth and inflation. Meanwhile, the closely-watched 10-year Treasury, whose yield had earlier this year been expected to push beyond 3.1% as U.S. growth surged, instead fell as low as 2.746% the day after the Fed decision before recovering to 2.796% mid-morning on December 21.
For insight and context from Legg Mason’s investment managers on the Fed and global growth, explore Brandywine Global’s Take a Break, Mr. Powell and Western Asset’s The Continuing Uneven Global Recovery .
U.S. growth: Good headlines, disappointing details
The third, and most detailed, official 3Q report of U.S. growth came in strong, at a trailing-12-month rate of 3.4% -- only slightly below the consensus estimate of 3.5%. Personal consumption rose 3.5% over the same period and the Fed’s benchmark Core Personal Consumption Expenditure (PCE) inflation measure came in at 1.9% year-over-year.
But some related numbers were less inspiring, suggesting a possible sudden stall in corporate capital spending. For November, capital goods non-defense new orders, ex aircraft and parts, fell -0.6% vs. October, confounding expectations of a 0.2% increase. Shipments in the same category also fell, -0.1% vs October, against expectations of a 0.2% rise. Preliminary figures for overall durable goods orders rose 0.8% vs. October but fell well short of consensus forecasts. And durable goods ex transportation fell -0.3%.
All this may help explain the continued plunge in crude oil prices. Brent crude prices are now down some 37% from the October 3 peak to $53.75 per barrel (bbl).WTI crude is down nearly 40% to $46.21. Because falling prices are taking place in the context of a renewed U.S. embargo on Iranian oil and a Saudi pledge to cut production by about a million bbl per day, some observers believe crude oil prices also reflect a falloff in overall demand driven by flagging global growth.
[1] Source: Bloomberg, December 21, 2018, 10:00 AM ET
Definitions:
The Federal Funds rate (Fed Funds rate, Fed Funds target rate or intended Federal Funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.
The Personal Consumption Expenditures (PCE) Price Index and the PCE Deflator are measures of price changes in consumer goods and services; the measures include data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.
IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets .
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
