The Market Today
President Making Fed’s Job More Difficult
by Craig Dismuke, Dudley Carter
3Q GDP Holds at 3.5% but Details Show Better Business Investment, Less Reliance on Big Quarter from Consumers: Third quarter GDP was unchanged in its first revision at 3.5% QoQ, SAAR. However, the details are actually a bit more positive. Growth was more evenly spread out in the revision, rather than the consumer carrying the quarter. Personal consumption was revised down from +4.0% to +3.6% positioning the consumer to have more powder heading into 4Q. Business investment was notched higher from +0.8% (a concerningly low level for Fed officials) to +2.5%. Residential investment (housing) was not quite as bad as initially reported (revised up from -4.0% to -2.6%). Government spending was revised down from +3.3% to +2.6% on weaker spending at the state and local level. In the volatile inventories and trade categories, the results were mixed. Inventories grew $10.3 billion more than initially reported while the trade deficit was revised $6.8 billion higher. Those two changes almost offset one another, but the increase in inventories gives a higher bar to clear for 4Q growth. However, the stronger business investment and more powder for the consumer are good signs heading into 4Q. One area of concern for Fed officials, Core PCE was revised lower from 1.6% to 1.5%. However, October’s PCE inflation report is scheduled for tomorrow and will give a more timely indicator of inflation pressures.
Mortgage Applications Up, New Home Sales, Fed Chair Powell: Also released this morning, mortgage applications for the week ending November 23 rose 5.5% on an 8.8% increase in purchase apps and a 0.5% increase in refi apps. Applications remain very low despite the positive results for the week. At 9:00 a.m. CT, October’s New Home Sales report is expected to show a 4.0% increase in sales. At 11:00 a.m., Fed Chair Powell is scheduled to speak at the Economic Club of New York. Analysts will be listening for any softer tone regarding a December rate hike and any response to the recent criticism from the President.
THOUGHTS ON THE FED AND THE PRESIDENT’S CRITICISM
Vining Sparks on Fox Business – The Fed’s Dilemma of Presidential Criticism: Vining Sparks’ Chief Economist, Craig Dismuke, appeared on Fox Business this morning discussing the challenges being created for the Fed by the President’s criticism. The Fed’s December meeting would be the most appropriate time to pause its rate hikes given the recent run of data. However, because Fed independence is critical, they cannot give the perception of being influenced by political forces. The loss of perceived independence at the Fed would arguably be more damaging to the markets than one-too-many or one-too-few rate hikes. As such, the bar is even higher for pausing in December than it would have been absent the President’s criticism. Click here to watch the interview.
The President Could Likely Change the Fed Chair but the Impact Would Be Negligible: According to the Federal Reserve Act, the President can only remove a Fed Governor on a for-cause basis. While there is some ambiguity around this, the judiciary is unlikely to see a disagreement over policy positions as meeting a for-cause standard. The Act is less clear on if the President can remove the Chair from the position and nominate a new Chair. However, even if he does so, there is no reason to believe the Committee would change its view on the appropriate path for policy. The make-up of the voting bloc would remain the same. Unless he were to resign, Powell would remain a voting Governor through the end of his term in 2028. Any new nominee would need to be approved by the Senate which could be tricky under such circumstances. In the interim period, Fed Vice Chair Clarida would fill in as Chair and has shown no less confidence in growth than has Powell. Moreover, the Committee functions, and will continue to function, as a meritocracy in which intellect is capital. Naming a new Chair would not change this.
One More Seat to Fill: The one avenue through which the President could affect policy is in the final vacant Governor’s seat. Marvin Goodfriend has already been nominated for the position but has been stuck in the Senate’s approval process. If his nomination were withdrawn, the President could appoint an uber-dove to the Board; but, even then, this would only affect one vote out of twelve.
Yesterday – Stocks Recovered Late as Trade Uncertainty Continued Ahead of This Weekend’s G-20: U.S. equities salvaged Tuesday’s session with an afternoon recovery sufficient enough to erase an early-morning drop. U.S. futures predicted the weak start to trading on renewed uncertainty around U.S.-China trade, driven by a Monday afternoon WSJ interview with President Trump that had weighed on global markets overnight. The President still expects the 10% tariff rate on $200B of Chinese goods to rise to 25% at the turn of the year, adding that the remaining balance of approximately $267B could be tagged if near-term negotiations don’t lead to a deal. However, stocks turned positive around 1 p.m. CT after Larry Kudlow, the President’s top economic adviser, said “the president is extremely disappointed” with China’s response to U.S. trade concerns but believes “there is a good possibility” a deal can be reached. Kudlow noted, “As you can imagine this is a big deal, this meeting [Trump and Xi at G-20] — the stakes are very high, …It’s an opportunity to turn a new page, …President Xi can step up and come up with some new ideas for us.” The S&P 500 ultimately gained 0.3%, splitting a 0.4% gain for the Dow and no change for the Nasdaq. Treasury yields perked up modestly on the recovery in stocks after briefly falling below Monday’s level following a steady auction of 5-year notes. The 2-year yield rose 0.8 bps while the 10-year yield added a smaller 0.4 bps. Despite comments from several Fedspeakers, Fed Funds futures were hardly changed.
Overnight – Markets Brace for Second Half of Week Full of Key Events: Markets continued to swing about overnight ahead of key events in the second half of the week that could cause notable moves in either direction. The first of those comes today with Fed Chair Powell’s speech later this morning. Powell has already been pulled back into the headlines this week after President Trump re-upped his criticism of the Federal Reserve’s rate increases. The president said the Fed “is a much bigger problem than China” and separately stated he’s “not even a little bit happy” with his decision to give Powell the job. And while tomorrow’s U.S. economic calendar includes a couple of key releases, including the November Fed Minutes which could affect expectations for policy in 2019, the bigger news comes this weekend as Presidents Trump and Xi break bread together in Buenos Aires. The dinner, scheduled during the G-20 meeting, has become a key event in the ongoing trade dispute. Markets hope the two leaders can work out a way forward to address concerns without further escalation of the tariff battle. Chinese stocks turned positive for the week following a 1.3% gain overnight. The U.S.-China trade meeting also has implications for Europe, where stocks were 0.2% higher this morning. The British Pound was the strongest major currency Wednesday on a report that PM May would allow Parliament to vote on changes to the exit deal she struck with the EU. U.S. futures were firmer and the Treasury curve was little changed.
Consumer Confidence Cooled In November on More Uncertainty About the Future: The Conference Board’s Consumer Confidence Index pulled back as expected in November, matching the median economist’s estimate of 135.7. The monthly decline was the net result of a slightly firmer assessment of the current situation (index rose from 171.9 to 172.7) partially offsetting a weakening of future expectations (index fell from 115.1 to 111.0). Consumers rated current business conditions a bit softer than in October but the labor market more than made up for the decline. The labor market differential (% Jobs Plentiful – % Jobs Hard to Get) hit a new high for the cycle, and the strongest since January 2001. Looking ahead, consumers’ relative expectations for business conditions, employment opportunities, and family incomes all saw slight deteriorations. And while the market volatility has yet to visibly shake the Fed, consumers showed more trepidation in the ancillary responses. The share who expect interest rates to go up further was the largest since 2006 while the number expecting higher stock prices sank to the second lowest level since the election. Despite some softer metrics, the overall index (2nd best of the cycle) and both the current assessment (2nd best of the cycle) and future expectations (3rd best of the cycle) remain at solid cyclical levels.
Bullard Believes Slower Growth Will Affect the Fed’s Plans in 2019, 2020: St. Louis Fed President Bullard, who will rotate back on the voting committee in 2019, made unscheduled remarks in an interview with Reuters. Bullard indicated that a possible slowdown in the U.S. economy could prevent the Fed from carrying forward the current pace of tightening into 2019. Bullard said, “Whether there are cracks in the U.S. economy’s performance is one of the main challenges for the Fed going forward, …The good news won’t last forever, and if potential growth really is at 1.8 percent the economy is going to return to some level more like that, …I don’t have any reason to doubt the economy will slow in 2019 and 2020. It would be much tougher for the Fed to continue to raise at this pace in a slowing economy relative to where we have been.”
Fed Panel Proves Uneventful, Evans Supports “More Normal” Fed Funds Rate: A panel of Fed Presidents provided little new information on what to expected from Fed policy ahead of the December 19 decision. The general message from the Fed’s Bostic (Atlanta, current-year voter), Evans (Chicago, 2019 voter) and George (Kansas City, 2019 voter) was that the U.S. economy as a whole is doing well, despite some headwinds from trade and some softness in autos and agriculture, and that a shortage of workers is a sign the labor market is tight. Only Evans made any real mention of interest rates saying “it’s time to get back toward something that’s more normal, …we’ve gotten inflation back up to 2%. That’s really something to be happy about because we spent a lot of time below 2%.”