The Macro View

United States

  • Third quarter U.S. economic growth was revised higher to 3.2% from 2.9%, according to the second estimate.
  • Consumption grew at a better than expected 2.8%, contributing positively to the upward revision.
  • The U.S. labor market continues to tighten, job creation has been solid and the number of people filing for jobless claims are at historic lows.
  • We continue to see gradual improvement in the housing sector, while the manufacturing sector has shown further signs of stabilizing.

International

  • Third quarter U.K. economic growth was confirmed at 0.5%, according to the second estimate.
  • For now, U.K. economic data is holding up well, however, it is still too early evaluate the medium and long-run impact of the Brexit vote.
  • Third quarter Eurozone growth was confirmed at 0.3%, supported by household consumption.
  • ECB president Mario Draghi continues to characterize risks to growth as tilted to the downside.
  • Economic data coming out of China has been largely consistent with economic growth rates that will satisfy official targets, the question is whether they will be able to sustain these levels in 2017.

Global Monetary Policy

  • Global monetary policy remains exceedingly accommodative by any historical measure.
  • The Fed voted to tighten monetary policy, raising interest rates by a quarter point. The increase was just the second such hike during the last decade.
  • The Bank of England voted to leave policy unchanged, stressing that they can move in either direction in response to income economic data.
  • The ECB also held a December meeting and voted to extend their bond purchase program to December 2017 while decreasing the size of their monthly purchases from 80 billion euros to 60 billion.

United States

  • According to preliminary estimates, the U.S. economy expanded by a solid 2.9% in the third quarter of 2016.
  • Consumption grew at a moderate 2.1%, while an inventory build and a surge in exports helped support headline growth.
  • The U.S. labor market remains in good condition as job creation has been solid and the number of people filing for jobless claims is quite low.
  • We continue to see gradual improvement in the housing sector, while the manufacturing sector seems to be stabilizing after a rough start to the year.

International

  • According to preliminary estimates, the U.K. economy grew by 0.5% in the third quarter, surpassing market expectations.
  • For now, the U.K. economy is holding up well. However, it is still too early to evaluate the medium to long-run impact. Thus, recent data has to be interpreted with a grain of salt.
  • The Eurozone economy continued to bump along during the month of October, with risks to growth still prevalent.
  • The Eurozone unemployment rate was steady at an elevated 10.0%, while inflation continues to be running well below the official target.
  • Economic data out of China has been relatively robust. However, China’s currency continues to weaken versus the U.S. dollar as development continues to warrant attention.

Global Monetary Policy

  • Monetary policy remains exceedingly accommodative by any historical measure.
  • The Fed voted to leave policy unchanged, but the table is set for a hike in December barring any unforeseen exogenous shock.
  • The Bank of England also voted to leave policy unchanged, highlighting the limited appetite for above target inflation that will likely be sparked by the recent decline in pounds.
  • In general, developed market central banks seem to be shifting toward policies that help create steeper yield curves.

United States

  • Second quarter U.S. economic growth was revised higher to 1.4%, according to the third and final estimate, leaving first half growth just north of 1.0%.
  • The markets will be anxiously awaiting the U.S. presidential election, as this election cycle has proven to be unlike any other.
  • Business investment will suffer from increased uncertainty surrounding the election and potential policy implications.
  • We remain encouraged by the resiliency of the U.S. labor market and elevated measures of consumer sentiment, both positives for consumption going forward.

International

  • The U.K. economy remains mired in post-Brexit uncertainty; in contrast the economic data has held up relatively well.
  • Thus far, U.K. consumers appear somewhat unfazed by the increased political uncertainty while the same is not true for businesses.
  • Meanwhile, the U.K. unemployment rate has held at cycle lows and inflation measures are running below long-run targets.
  • After strong Eurozone economic growth in the first quarter, second quarter growth slowed and risks remain tilted toward the downside as we await third quarter estimates.
  • Monetary policy has tried to support a struggling Eurozone economy, but help is needed on the fiscal side.
  • China remains the source of considerable uncertainty as their currency continued to weaken versus the dollar throughout September.

Global Monetary Policy

  • All four major developed market Central Banks held meetings in September to set, evaluate, adjust, and or tweak monetary policy. Monetary policy remains exceedingly accommodative by any historical measure.
  • The Bank of England (BOE) and European Central Bank (ECB) both resisted the urge to ease policy further taking a wait and see approach while flashing their dovish feathers.
  • The Fed voted to leave policy unchanged, but the number of descents grew from one to three, suggesting a growing divide within the committee.
  • Interestingly, the BOJ shifted policy and will now target specific yield levels while signaling to markets that they intend to let inflation run hot.

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          Coronavirus Uncertainty

          When nothing else could derail risk markets, along comes the coronavirus (COVID-19). At this point, it is unclear what the ultimate human and economic impact of the virus will be, but downside risks abound. The market response has been to sell risk assets and buy the safety of U.S. Treasuries in a classic flight-to-quality trade. The S&P 500 is down -12.7% from the February 19th record close and is now down -8.27% for the year. Meanwhile, the yield on the 10-year U.S. Treasury fell 40 basis points to a new all-time low of 1.11% and is down 77 basis points for the year.

          A

          From a return perspective, investment grade bonds benefited nicely from the dramatic move lower with Treasuries 1 producing positive monthly and year-to-date returns of 2.65% and 5.16%, respectively. The broader Bloomberg Barclays Intermediate US Government/Credit Index returned 1.41% for the month and 2.85% year-to-date. There was no such silver lining for the equity markets as the selling was aggressive and broad-based. Meanwhile, the high yield bond market 2 was down slightly for the month (-1.54%) and year (-1.53%); it faired significantly better than equities thanks to the positive price appreciation from the move lower in interest rates in the broader risk off environment.

          A

          To us, the most amazing part of the recent equity market correction is not the magnitude or velocity of the price swings, but instead the instantaneous clamoring from market participants for additional Fed stimulus, emergency rate cuts, coordinated global easing and yes even another round of tax cuts from the Trump administration. What would they ask for if equity markets sold-off 20-30%? These types of reactions to a 12% market correction speaks to a much bigger issue in today’s financial markets that we’ve been talking about for years. Namely, the markets’ dependency on easy money. It’s an issue. The Fed knows it, but they don’t know what to do about it.

          A

          To be sure, additional easing from the Federal Reserve is not going to solve the coronavirus outbreak. Additionally, they have been clear that monetary policy is on hold until there is a material reassessment to the economic outlook or inflation is significantly and persistently above their 2% target. To date, neither has happened. Of course, markets are forward- looking and pricing in the future negative impact of the coronavirus, thus asking for easing today. We do not envy the Fed’s position. Trying to set monetary policy during a period of market turbulence, sparked by a novel virus that nobody knows a thing about, is challenging to say the least.

          A

          If the virus gets materially worse from here, the negative economic implications will be undeniable and unavoidable. The Fed would be forced to ease policy further, attempting to spur a stalling U.S. economy. However, if the Fed chooses to preemptively respond and the economic outcome turns out to be less dire, then their…