November 12, 2019
Fed Likely to Defy History With Rates Steady Through Elections
“Federal Reserve Chairman Jerome Powell is likely to signal again this week that monetary policy is on hold, buttressing the belief that he may steer clear of action through 2020. Surprisingly, that would be an historic anomaly for a U.S. presidential election year. Rather than keeping its head down, the Fed has changed policy in one direction or another in each of the last 10 presidential polling years — though in 2016 it didn’t act to raise interest rates until after the November election. In 2012 the Fed didn’t move its benchmark rate, which was already at zero, but did announce its third round of large-scale asset purchases in September. “If you look back in history and see what the Fed did in election years, the Fed did everything they had to do,’’ said Roberto Perli, a partner at Cornerstone Macro in Washington. The best way for them to preserve their independence and credibility “is to do what they think is right.’’ That hasn’t always shielded them from criticism. President George H.W. Bush famously blamed then-Fed Chairman Alan Greenspan for costing him re-election in 1992 by failing to cut interest rates more aggressively. But it’s particularly vital now for the Fed to make the case that its policies are warranted by the economic outlook because of the relentless public assault on the institution by President Donald Trump. Breaking with more than a quarter century of precedent, Trump has repeatedly lambasted the Fed and accused it of keeping credit too tight, most recently on Oct. 31, the day after it reduced rates for the third time this year. Powell will have a chance to make his case twice this week, on Wednesday before the Joint Economic Committee of Congress and on Thursday to the House Budget Committee. He’s likely to echo the message he delivered after the latest Fed rate cut: The economy and monetary policy are in good place in the 11th year of America’s longest expansion. Investors seem to agree. Stock and bond prices have risen in recent days on signs that the U.S. economy is weathering a slowdown abroad and on hopes of a phase-one deal in the U.S.-China trade war. “Things feel a lot less threatening than they did two months ago,’’ said Carl Tannenbaum, chief economist with Northern Trust Corp. in Chicago. “The data for the U.S. has suggested that we’re not on the edge of falling off a cliff.” Front and center in that regard was the October employment report, which showed payrolls rising by 128,000 despite the loss of 41,600 jobs due to the since-ended General Motors Co. strike.”
European Earnings Are Pretty Good, Except for Energy
“Not so bad. That’s the view of most strategists examining the European earnings season. As we approach the reporting period’s final stretch, the picture isn’t as grim as initially feared as most sectors are actually delivering growth. But overall, the region is in an earnings recession and looking forward, companies may struggle to meet expectations for the fourth quarter and for next year without some improvement on the macro-economic front. We recently highlighted that Europe might have recorded profit growth in the third quarter if it hadn’t been for the energy sector. Bloomberg Intelligence strategists even show that without a few “bad apples” in each country, companies posted a decent beat. The table below is pretty clear: energy stocks and financials provided the bulk of the earnings drag. The problem with those laggards is that they carry a heavy weight in indexes. For example, BP and Royal Dutch Shell make up almost 16% of the FTSE 100. Aside from energy, earnings have not only been brighter than consensus expectations, but also better than that implied by feeble Purchasing Managers’ Index economic data, JPMorgan strategists say. They also point out that overall, sales growth is 2% year-on-year, which is particularly encouraging given the fall in commodity prices. This is usually a “good lead indicator for revenue growth.” The top line could pick up further, provided that commodity prices stay at current levels or bounce back, JPMorgan says.”
China Turning Into One of Germany Inc.’s Biggest Headaches
“German businesses are more pessimistic on one of their biggest markets than they’ve been in years. A survey of more than 500 companies with operations in China showed only a quarter expect to meet or exceed their business targets this year, according to the German Chamber of Commerce in China. More than 80% are experiencing either direct or indirect repercussions from ongoing trade tensions between China and the U.S., on top of longer-standing issues such as rising labor costs and barriers to market access. The results highlight Germany’s exposure to China’s economic woes. Growth in the Asian country has slowed to the weakest in almost three decades amid weak domestic demand and a crackdown on risky debt. Car sales are set to decline for a second year following two decades of expansion, hitting German companies particularly hard. Just last month, Volkswagen AG lowered its outlook for vehicle deliveries in 2019 amid a faster-than-expected decline in global car markets and an unprecedented slump in China. Daimler AG has stumbled with two profit warnings this year. The traditionally strong machinery and industrial-equipment sector has also seen business expectations decrease significantly, according to the survey. Uncertain export prospects helped push the German economy to the brink of recession this year. For 2020, companies reported some tentative signs of recovery, the chamber said. It also called for the conclusion of an investment agreement between the European Union and China and improvements in fair market access.”
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