- Dovish Powell lifts U.S. stocks, sinks dollar. The S&P 500 Index posted its biggest daily gain since March yesterday, while the U.S. dollar index fell to the lowest in a week after Federal Reserve (Fed) Chair Jerome Powell said current interest rates are “just below neutral,” or the point where monetary policy is neither accommodative nor restrictive to the economy. Investors interpreted his comments as dovish, especially since they effectively walked back Powell’s early-October comment about rates being a long way from neutral (that contributed to the latest bout of market volatility). Fed funds futures are currently pricing two rate hikes between now and the end of next year, while the Fed’s September dot plot projects four rate hikes over that period. From a technical perspective, the greenback looks like it may still have more upside. That said, a change in the Fed outlook could cause the dollar to revert back to its (very) long term downtrend and support international equity markets, particularly emerging markets.
- Europe up to its old tricks. European data missed expectations at an historic clip this summer, sending the Citi Economic Surprise Index to a minus 101 in June. After better economic reports versus expectations in July and August, widespread shortfalls have resumed, sending the index from a slight positive reading in early September to minus 63 as of November 28. While Eurozone gross domestic product (GDP) growth may reach a somewhat respectable 2% in 2018, consensus currently reflects just 1.6% GDP growth in 2019 (source: Bloomberg). With sluggish growth and elevated political risk, we continue to recommend minimal exposure to Europe in tactical equities allocations.
- Japanese economy is slowing. The latest flash manufacturing Purchasing Managers’ Index for November from Markit and Nikkei released earlier this week fell to 51.8 from 52.9 the prior month, the lowest reading since November 2016. Economic growth in Japan is not expected to exceed 1% in 2019, based on Bloomberg consensus, despite aggressive ongoing monetary policy support and some structural reforms-though more are needed. We prefer investing in Japan to Europe, but favor U.S and emerging market equities over both.
- More signs of a healthy consumer. Personal incomes rose 0.5% in October, while personal spending climbed 0.6% last month, both beating consensus estimates. Incomes and consumer spending have accelerated at the fastest pace in years over the last few months, thanks to fiscal stimulus and modestly growing wages. Core personal consumption expenditures (PCE), which excludes energy and food components, rose 1.8% year over year last month, just below the Fed’s 2% target for the inflation gauge. While core PCE growth slowed in October, it has hovered around 2% for most of this year, and we expect pricing pressures to remain manageable as the Fed gradually tightens.
- Capex cools. Capital expenditures (capex) have grown solidly over the past two years, but trade tensions have started to hinder the promising improvement in business spending. In a LPL Research Blog, due out later today, we’ll highlight the current roadblocks that have slowed capex growth, even amid fiscal stimulus and strong S&P 500 profit growth.
- Core PCE (Oct)
- FOMC Meeting Minutes (November)
- Tokyo CPI Report (Nov)
- China Manufacturing PMI (Nov)
- China Composite PMI (Nov)
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