Mnuchin seeks to calm jitters, fails. In an attempt to pacify nervous investors, the Treasury Department released a statement yesterday indicating that Secretary Steve Mnuchin called the CEOs of the nation’s six largest banks to confirm “they have ample liquidity available for lending to consumer, business markets, and all other market operations.” However, though equity prices have suffered recently amid concerns on a number of issues, bank liquidity was not one of them. Investors subsequently questioned whether there was another, more systemic issue, that was yet to be unveiled. We, along with most on Wall Street, do not believe that to be the case. Rather, the Treasury was likely being overzealous in trying to calm market jitters, particularly after reports over the weekend suggested President Trump was considering firing Federal Reserve (Fed) Chair Jerome Powell. The Treasury secretary squashed those rumors via Twitter, and the Administration’s Chief of Staff noted that the President doesn’t have the authority to remove him anyway.
Investors are struggling with the ferocity of the sell-off. Ironically, the very same policy measures that had supported economic and profit growth – improved fiscal incentives and gradual monetary tightening – were suddenly questioned by investors over the past six weeks. To be sure, misunderstanding between the Federal Reserve’s objectives and investors’ expectations have been a driving force in this downturn. Yet when considering the pace of nominal GDP (real GDP plus inflation), a fed funds rate of 2.5% is still accommodative. But, investors have become used to easy money and Fed Chair Jerome Powell has made it abundantly clear that there will no longer be a “Fed Put Option” to act as equity market support. However, given record GDP and employment, inflation below the Fed’s objective for price stability, and near cycle highs in manufacturing and services reports, we continue to see more positives than negatives heading into 2019. For more details, please see our 2019 Market Outlook, FUNDAMENTAL: How to Focus on What Really Matters in the Markets
Week ahead. The U.S. economic calendar is light due to the Christmas holiday, though consumer confidence and several sets of housing data are noteworthy. The European docket has inflation data out of Germany, while Japan will release Leading Index and industrial production figures. Track these and other important events on our Weekly Global Economic & Policy Calendar.
Weekly Market Drivers Blog. Please read our recent blog, “Fed Fails to Appease Markets,” for perspectives on recent market weakness and the outcome of last week’s Federal Reserve’s monetary policy meeting.
Closer Look at Bear Markets Blog. Going back to World War II, we found there have been 14 bear markets, with seven taking place during a recession and seven without an accompanying recession. Please read our blog for our analysis and perspective.
Government shutdown blog. With Congress failing to strike a deal before last Friday’s midnight deadline, a partial government shutdown ensued. But history suggests markets don’t pay much attention to them, as we discussed earlier this month on the LPL Research blog. While officials believe the stalemate could stretch into January, a majority of the government is funded (~95%), and various parts that are impacted are normally closed over the holiday period.
- Japan PPI Report (Nov)
- Japan Leading Index (Oct)
- Initial Jobless Claims (Dec. 22)
- New Home Sales (MoM, Nov)
- Conference Board Consumer Confidence Index (Dec)
- Japan Jobless Rate (Nov)
- Japan Industrial Production (Preliminary, Nov)
- Japan Retail Sales (Nov)
- Wholesale Inventories (Preliminary, MoM, Nov)
- Retail Inventories (MoM, Nov)
- Pending Home Sales (MoM, Nov)
- Germany CPI Report (Preliminary, Dec)
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