DIASTOLE ECONOMIC AND MARKET COMMENT
January 28, 2019
This coming Saturday is Groundhog Day - the day we celebrate Bill Murray movies and find out if the government will shut down again on February 15th. Do I have that right?
But as of this morning, at least, the partial government shutdown is over. Within a few days, affected federal employees will receive their back pay, and museums and national parks will reopen. But contract workers may never receive catch-up checks, and federal workers who are worried about the next looming shutdown (in three weeks) may choose this time to look for other jobs.
It’s a good market in which to find work, with Friday’s initial unemployment claims coming in under 200,000 for the week ending January 19th. That’s the lowest level since November of 1969.
The U.S. economy is chugging along, but fears of global economic weakness are creating choppiness in our stock markets. The latest news from China is of a shrinkage of industrial profits, which were down 1.9% in December (versus December 2017). And in Japan, consumer prices rose just 0.9% last year, while the Japanese Central Bank has been hoping to reach 2%. The two countries are in very different spots, with Chinese GDP still growing at over 6% annually, but apparently beginning to slow down, while the Japanese economy fights hard to avoid deflation.
Stuff happening this week: trade negotiators from the U.S. and China will meet on Wednesday and Thursday to try to come to a trade rapprochement. Or detente. Why do the French have all the best words for reconciliation? (Reconciliation is a word with Latin AND French roots.)
The Federal Reserve Open Market Committee meets mid-week. Beginning this year, each monthly meeting of the Fed’s OMC will be “live” - meaning that they will hold a press conference and could conceivably raise rates. A rate hike, however, is NOT expected this month. What we might hear more about is the Fed’s consideration of a change to its balance sheet. During the Great Recession, the Fed acquired lots and lots and lots of bonds and mortgages in an attempt to keep liquidity flowing through our economy. This was called Quantitative Easing (QE). Well, now that the Recession is over, the Fed stopped buying, and has been quietly selling its bonds. They may stop doing that if they believe that the economy is not strong enough to handle the unwinding. Just the fact that they’re thinking about slowing down may worry some investors.
Tomorrow, the British Parliament will vote again on some amendments to Prime Minister Theresa May’s Brexit deal, including one that states that if there is no agreement with the European Union about Brexit, the U.K. will ask for an extension rather than take a “hard” Brexit with no deal at all. This amendment is unlikely to pass since members of Parliament (MPs) appear not to know what they would do with the extra time. Unsubstantiated reports (i.e. gossip) indicate that the British government is working with pharmaceutical companies to prevent Brexit-induced drug shortages and may even invoke martial law if a “hard” Brexit causes civil unrest. Let us hope that Brexit fears are as overblown as Y2K fears were. Sadly, I date myself.
Other international news is focused on Venezuela, home of hyperinflation, food shortages, and fleeing citizens. Last week the head of the national assembly, Juan Guaido, declared himself acting president on the grounds that the recent reelection of strong man Nicolas Maduro was illegitimate. Guaido promises to hold new elections. But Maduro is not stepping down, and the country’s problems may grow worse under rival regimes. The final determination of who is in charge may come from the military, which has supported Maduro, but is now showing signs of cracking. Army officers who choose to back Guaido will almost certainly face stern (or worse) repercussions if Maduro remains in charge. The U.S. was quick to recognize Guaido as the interim president, and Canada and the major South American countries followed suit. Further complicating the situation is the fact that the U.S. is Venezuela’s number one oil customer, buying 39% of Venezuela’s deliveries last year. And Venezuela is America’s fourth largest oil supplier.
Big tech companies will be releasing their fourth quarter earnings reports this week. Apple has already prepared us for bad news. The real question is whether other tech companies like Microsoft and Amazon will be caught up in the same downturn. Good reports from chip manufacturers last week indicate that maybe Apple is a one-off. Fingers crossed. (That is a technical term used widely among stock analysts. Now you know.)
I did not watch the football playoffs, but I sure heard about them. Even the business-news shows to which I am addicted covered the games and the questionable calls and non-calls. And now a New Orleans attorney has filed a lawsuit which asks NFL Commissioner Roger Goodell to force a replay of the Saints/L.A. Rams game from the moment of the missed pass-interference call. It seems unlikely to happen, but who doesn’t love a good lawsuit?
The most expensive home ever bought in the U.S. is no longer yours. It belongs to hedge-fund manager Ken Griffin. Mr. Griffin just paid $238 million for a 24,000 square foot, multi-floor penthouse that is under construction on Central Park South in New York City. It is not expected to be his primary residence.
And finally, for $200,000 or $250,000, depending on whom you ask, you can now book a suborbital flight on a Richard Branson Virgin-Galactic rocket for later this year. The rocket will zoom you to the edge of the earth’s atmosphere, providing you with a minute or so of weightlessness. Jeff Bezos’ company Blue Origin is getting ready to offer the same kind of flight for an unknown ticket price. It seems that all of the best billionaires now have rocket companies. What do they know that we don’t?
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For the week ending January 25th, the Standard & Poor’s 500 closed at 2,664 (up about 6% for 2019 to date) although by midday today stocks were sliding on the news of a Chinese slowdown. The Dow Jones Industrial Average closed at 24,737, and the Nasdaq was at 7,164. The yield on the ten-year Treasury Note finished at 2.76%, very close to the yields on the two-year and thirty-year - implying more economic confidence in the short-term than the long-term. U.S. crude oil ended at $53.69 per barrel, N.Y. gold ended at $1,297.40 per ounce, and one Euro was worth $1.1414.
Elizabeth E. Cook
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Business Insider, The Wall Street Journal, The New York Times, Barron’s, The Economist, Bloomberg, Reuters, CNBC, and The Associated Press. If you have any questions, please call us at 203.458.5220 or reply to this email. And best wishes to Punxsutawney Phil!