The Week Ahead: Don't Skip Steps On Escalation Ladders

The drop in US yields and disappointing economic data weighed on sentiment and the dollar last week. Even weakness in equities, which had seemed to lend the greenback support, failed to do so at the end of last week. With the real Fed funds rate (adjusted for inflation) below zero, employment at 50-year lows, and some fiscal stimulus still in the pipeline, the doom and gloom cant of a recession next year seems misplaced. 

We too, have been tracking late-cycle economic behavior, including weakness in the interest rate sensitive sectors, like housing, the 12-month moving average of non-farm payrolls peaked a couple of years ago, and some elevated measures of debt-stress. Moreover, the large dollop of fiscal stimulus, which by some metrics was bigger than what was provided during the global financial crisis a decade ago, goosed the economy and there was little doubt that the 4.2% annualized pace of growth in Q2 was an anomaly and most certainly ought not to be used as a benchmark. 

Similarly, the fact that job growth this year is averaging better than last year may have lulled some into complacency from which they are over-reacting. The synchronized global expansion has been replaced with a synchronized downturn. Next week's US data, including retail sales and manufacturing production, are expected to show an economy that is still expanding above what the Fed understands to be the long-term growth potential (given demographics and productivity), which is a little below 2.0%. 

Fed Chairman Powell's assessment, shared less than 24 hours before the November employment report, that the "labor market was very strong by many measures" and that the economy was "performing well overall" is anchored into a larger view. It will not be challenged by the fact that a statistically noisy and volatile report, that is subject to revisions, disappointed median forecasts.

It is going to take more than a week to assess what the US and China agreed to at the G20 meeting. There was not a joint statement. Each side claimed somewhat different takeaways. Yet each did seem to recognize some period that results are important. Chinese statements have not specified the period. The US has indicated 90 days for an escalation freeze. The US President and his top economic adviser disagreed on when the 90-day period begins. Of course, it must be immediately. Otherwise, there is no agreement this month, and ostensibly Trump could start the process toward making good his threat to slap a new tariff on the remaining $265 billion or so of Chinese goods the US imports.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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