Monday Musings: February 3, 2020

Feb 03, 2020


Public Trust Credit Team

Federal Open Market Committee (FOMC) update and latest economic data

Last week, the Federal Reserve board members voted unanimously to keep the Federal funds target range unchanged at 1.50% – 1.75%, an action that was widely anticipated by the market. As expected, the Fed raised the interest rate paid on excess reserves by five basis points to 1.60% and the rate on overnight reverse repurchase (repo) agreement facility by five basis points to 1.50%. These actions should help maintain trading of Fed funds within the stated target range. The Fed indicated it will also continue supporting the repo market through repo operations at least until April to help reduce volatility in the short-term market during tax-filing season. It will also continue purchasing Treasury Bills at least into the second quarter to help ensure reserves remain ample. Chairman Powell’s comments around inflation, stating that they’re “not satisfied with inflation running below 2.00%,” suggest that the Fed may be open to cutting rates if inflation stubbornly remains below the 2.00% target. 
The FOMC continues to describe the economy as “rising at a moderate rate” and characterized household spending as “moderate” versus a description of “strong” in December. This is consistent with the latest household spending data that was released by the Commerce Department, showing household spending growing at a seasonally adjusted 0.3% in December, down from 0.4% the prior month. For the full year of 2019, household spending increased by 4%, the smallest pace since 2016. The Commerce department also released fourth quarter real GDP numbers, showing an annualized growth rate of 2.10% in the fourth quarter and 2.30% for the year 2019, down from 2.9% in 2018.

The U.K. left the European Union at 11 p.m. GMT on January 31, 2020, but the Brexit story will continue as the country now enters the 11-month transition period

The transition period will last until December 31, 2020, and during this time, the U.K. will remain in both the E.U. customs union and the single market, meaning many things will continue as normal while the U.K. and E.U. allow new negotiations to take place. With the U.K. entering the transition period, the country loses its membership of the E.U.’s political institutions including the European Parliament and European Commission. At the top of the negotiations list is the issue of a U.K./E.U. trade deal. According to the Wall Street Journal, cross-border trade between the U.K. and European Union totaled $850 billion in 2018, approximately half the U.K.’s total trade. If the U.K. and E.U. cannot reach an agreement at the end of the transitional phase, the outcome will result in a hard Brexit which both parties are seeking to avoid. After more than three years from the initial referendum and negotiations resuming around March, Brexit is far from over.

Coronavirus rattled markets as the virus continued to spread and businesses take action

According to the Wall Street Journal, global cases of the coronavirus have exceeded 17,000 with deaths topping 360. Chinese markets stumbled today and required a Chinese government intervention to stop the bleeding, with the Shanghai Composite Index down 7.70% on the first trading day after the Chinese New Year. In response to the outbreak, U.S. companies have started to take action. Major airlines have already canceled flights to China or significantly cut back on routes; Apple announced that it would close all stores in China through February 9, 2020; and the price of Brent Crude dropped 15% in January due to weakening demand from China, prompting OPEC to begin talks of cutting production. The virus has spread more quickly than SARS but has been significantly less fatal thus far. While we do not believe the virus will have long-term impacts for economic growth or markets, investors should likely be prepared for continued volatility in the near-term.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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