Date: December 27, 2018:
Treasuries May Have to Wait Until After New Year for Resolutions
Perhaps the best that can be said of a painful year across financial markets is that there’s room for improvement in 2019. It’s less clear exactly what might pull investor sentiment, and Treasury yields, off the current lows. Risk-averse trading in December — which is on track to be the worst month for U.S. stocks since the 2008 crisis — has dragged the benchmark 10-year Treasury yield down to 2.73 percent. That’s more than half a percentage point below its 2018 peak in October. Investors are responding in part to tightening financial conditions and a souring economic outlook, and some think that the Federal Reserve could be headed for a mistake with further interest-rate hikes. Placating financial markets may not be on Fed Chairman Jerome Powell’s list of new year’s resolutions, but investors will be on alert when he joins his predecessors for an interview this Friday at the American Economic Association meeting. Jefferies LLC’s Thomas Simons doesn’t expect the Fed chief to suddenly start wringing his hands over the recent volatility in stocks. But another way to calm markets would be to note weak inflation, particularly if the Fed is leaning toward a pause in its rate-hike cycle. “That could be an under-the-table signal that they were not going to be raising rates,” said Simons, a money-markets economist in New York, who expects the Fed to hold rates steady in the first quarter.
U.K. Needs Leadership, U.S. Ambassador Says as Brexit Looms
The U.K. is in need of leadership, U.S. Ambassador to London Woody Johnson said, as he also cast doubt on the chances of a bilateral trade deal if Prime Minister Theresa May manages to push her Brexit agreement through Parliament. “I’m feeling the country is in need of leadership,” Johnson said on Monday in a BBC Radio interview. “You can see the frustration in the members of Parliament in trying to navigate what the people wanted when they voted in the referendum.” Johnson’s remarks are the latest to beset an uneasy relationship between the administration of President Donald Trump and May’s government. While the U.K. likes to tout its “special relationship” with the U.S., interactions between the two leaders have been fraught. Trump said a month ago that under the terms of the Brexit deal that May negotiated with the EU, Britain “may not be able to trade with the U.S.” Johnson on Monday reiterated that point. Trump is “looking forward to and hoping that the environment will lead to the ability of the U.S. to do a quick, very massive bilateral trade deal that could be the precursor of future trade deals with other countries around the world for Great Britain, that will really take you way, way into an exciting future,” Johnson said.
China Slowdown Continues With Factory Gauge at Lowest Level Since 2016
China heads into the new year with its factories back in contractionary territory as the threat of a prolonged trade war dampens sentiment and stimulus struggles to gain traction. The manufacturing purchasing managers index dropped to 49.4 in December, the weakest since early 2016 and below the 50 level that denotes contraction. Measures of new orders and new export orders slipped — a bearish signal for future demand — while readings for input and output prices weakened. “The slowdown will continue into the next year,” said Larry Hu, a Hong Kong-based economist at Macquarie Securities Ltd. “The weak PMI could result in more government stimulus to shore up the economy.” There was some good news as the non-manufacturing PMI rose to 53.8 from 53.4. That suggests recent stimulus efforts may already be starting to have some effect. “Services is increasingly a bigger part of the economy, so that holding up is a counter to the weaker manufacturing, but to maintain the pace of growth, more stimulus will be needed,” said Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce in Hong Kong.