As the year draws to an end, there is nothing going on. Rates have increased, the government has shut-down, oil prices are falling, and inflation is fading. Like I said, nothing to see here…
Rates
The Federal Reserve Bank (FRB) raised rates for the fourth time this year. Markets were expecting this, but they were also pricing in few to no rate hikes in 2019. The FRB’s forward guidance, however, reflected they would likely raise rates two more times in 2019. The markets responded negatively to that news. The fear being the economy is not strong enough to endure the current FRB rate policy–one which is targeting a neutral rate that seems currently restrictive.
US Government
Congress and the President have been back and forth over a budget to keep the government from a partial shutdown. The lack of $5B in funding for a border wall kept the bill from getting through. Ultimately, a revised bill with the funding died in the Senate. The next version will be done during the next session of congress, which could make a compromise even less likely. Markets seem to be preparing for the likelihood of a prolonged partial shutdown.
Oil
Slowing growth concerns for China, the world’s largest commodity consumer, has caused further price faltering in the oil markets. With the US becoming a net exporter of oil in 2018, a hit to oil is no longer a good thing. Countries that are net importers of oil stand to gain as consumption costs decrease. Net exporters see a hit to profits during this type of a move.
Inflation
Inflation is down for most of the globe, partially a result of oil price moves. Personal Consumption Expenditures (PCE), the FRB’s preferred measure of inflation, came in at 1.8% year over year through November. Inflation remains contained around the 2% mandate the FRB has per congress.
Conclusion
Markets fell hard last week; however, bear markets are not recessions. GDP growth for the 4th quarter is projected in the 2.5% range and PMI measures still read expansionary. We may be seeing the softening global economic finally hitting the US. This would make sense as we were buffered by fiscal stimulus (tax reform) for most of 2018. Volatility is normal and should be expected at this phase of the cycle…
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