Select Page


 

  • Market now expects no rate hikes in 2019
  • U.S. government shutdown seems likely to last until at least next week
  • U.S. Nov pending home sales expected to show modest rise
  • Manufacturing confidence so far remains solid 
  • EIA weekly petroleum report
 

Market now expects no rate hikes in 2019 — Market expectations for Fed rate hikes in 2019 hit a new low on Thursday with the market now discounting only a negligible chance of one rate hike.  Specifically, the Dec 2019 federal funds futures contract on Thursday rose to a new contract high of 97.595, which is equivalent to a yield of 2.405%.  That means that the market is expecting a negligible +0.5 bp rise in the funds rate by December 2019 from the current effective federal funds rate of 2.40%, which in turn translates into a 2% probability of a +25 bp rate hike (i.e., 0.5 bp divided by 25 bp).

The market as recently as last Friday was discounting a 50% chance of a 25 bp rate hike by December 2019.  However, those odds fell to nearly zero this week due to the reports that President Trump would like to fire Fed Chair Powell and due to the plunge in stocks seen early this week.

The recent stock market correction has encouraged the view that the U.S. economy will see rough sledding in 2019 and that the Fed will not be able to get anywhere near its Fed-dot forecast for two rate hikes in 2019.  In fact, if the market is right, President Trump doesn’t have to worry about a rate hike in 2019 and he might actually enjoy a 25 bp rate cut in 2020, the last year of his term.  The federal funds futures market is currently saying that the Fed is already done tightening for this cycle.

The key to what the Fed will actually do in 2019 is the real economy, not the current behavior of the stock market.  The stock market correction has prompted a great deal of pessimism about the economy and talk about whether there will be a recession.  However, the stock market could easily be over-reacting and the U.S. economy could still put in a decent performance in 2019.  The market consensus is for GDP growth in 2019 to ease to +2.6% from +2.9% in 2018.  A 2.6% growth rate in 2019 would be substantially above the Fed’s estimate of potential GDP growth of +1.9% and would undoubtedly cause the Fed to continue to raise interest rates. 

Yet the U.S. economy is currently pointing downward and the market does not know where GDP might stabilize.  The concerns about GDP growth in 2019 include (1) the cumulative effect of the Fed’s +225 bp hike in interest rates since 2015 and the tighter liquidity being caused by the Fed’s balance sheet draw-down program, (2) slower economic growth in Europe and China, (3) reduced world trade with the current U.S. and retaliatory tariffs and the possibility of more tariffs in 2019 if the current U.S. cease-fires fall apart with China, Japan and Europe, (4) fading stimulus from the Jan 2018 U.S. tax cuts, and (5) the prospects for severe U.S. political strife in 2019 with divided government and the possible results of the Mueller investigation.

 

U.S. government shutdown seems likely to last until at least next week — Congress convened for pro-forma sessions on Thursday but then adjourned until Monday, when the Senate will hold only a pro-forma session.  The U.S. government shutdown seems likely to last at least until next Thursday (Jan 3) when the new Congress begins.

House Democratic leaders are reportedly working on a plan for House Democrats, as soon as they take control of the House on January 3, to approve essentially the same bipartisan continuing resolution through February 8 that the Senate approved last week on a voice vote.  However, the Senate would then have to approve that continuing resolution again since it would be a new Congress by then.

We doubt that Senate Majority Leader McConnell would allow a Senate vote on a continuing resolution that is opposed by President Trump for not having enough border wall funding.  There would be no point in the Senate voting on such a CR since President Trump could simply veto that CR.  In short, the situation next week will not be much different than it is now.  At some point, either the White House or Congressional Democrats, or both, will have to blink in order to reopen the government.

U.S. Nov pending home sales expected to show modest rise — The market consensus is for today’s Nov pending home sales report to show an increase of +1.0% m/m, recovering some of October’s -2.6% m/m decline.  Pending home sales in general remain weak and were down -6.7% y/y in October.  The pending home sales report is a leading indicator for the existing home sales series since pending home sales contracts generally lead to closed home sales on a 1-2 month basis.

U.S. existing home sales have improved in the past two months with back-to-back increases totaling 3.3% in Oct-Nov.  However, existing home sales fell sharply in the previous six months (April-Sep) and were still down by -7.0% in November.  U.S. home sales have been hurt by poor affordability caused by the sharp 50% rise in home prices since the financial crisis and by higher mortgage rates.

Manufacturing confidence so far remains solid — The consensus is for today’s Dec Chicago PMI to show a sharp decline of -6.1 to 60.3, giving back much of November’s +8.0 point increase to 66.4.  On a national level, the market is expecting next Thursday’s Dec ISM manufacturing index to show a -1.3 decline to a still-strong 58.0 after November’s unexpectedly-strong +1.6 point increase to 59.3.  The ISM index is still signaling relatively strong optimism in the U.S. manufacturing sector, so far shaking off the stock market correction, trade tensions, and political strife.

EIA weekly petroleum report — The consensus is for today’s weekly EIA report to show a -3.25 mln bbl decline in crude oil inventories, +850,000 bbl gain in gasoline inventories, and -1.5 mln bbl decline in distillate inventories.

 

CCSTrade
Share This