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Despite Weak Confidence, Still Positive On US Amid Fed Pause

Published February 01, 2019

Despite a more dovish stance from the Fed this week and weaker consumer confidence data, we see plenty of reasons behind the headlines to be optimistic about the US economy. The first example of more positive indicators being unduly obscured by a focus on negative news is the latest Consumer Confidence Index data from the Conference Board. The index dropped 6.4 points to 120.2 in January –the lowest reading since July 2017. This followed its second largest drop in over three years last month:

On the surface, the drop in consumer confidence looks bad. But it’s important to look deeper into the data details. Nearly all of these recent losses in confidence came from the more volatile (and less reliable) expectations component of the index. Given the timing, this probably ties directly to the US government shutdown, which has now concluded. By contrast, the present situation metric embedded in the index, which is more closely associated with consumer spending, was little changed:


Two additional metrics give reason for optimism. The share of respondents stating they intend to buy a house within six months jumped to a new record high. We have long argued that the weakness in housing activity over the second half of 2018 was driven not so much by weak underlying demand but rather by stretched affordability. The pullback in mortgage rates over the last couple of months and the Fed’s now “patient” stance on future rate hikes should be supportive of housing activity as we head into the spring selling season. This signal from the Conference Board seems to support that view:


In addition, the labor differential—which measures the difference between those who think jobs are abundant and those who think jobs are scarce—actually improved slightly and remains near its high for this economic cycle. Consumers still see jobs as relatively plentiful. Unemployment claims and employment data support this view. Furthermore, this is likely to remain the case, despite market turbulence and increased uncertainty around the capital-expenditure cycle because labor is the more flexible of the two factors of production (compared to capital). So, although US firms may have delayed capex spending due to the ongoing trade war with China, there is not much evidence in business surveys of a meaningful pullback in hiring plans:


Finally, inflation expectations unsurprisingly dipped in light of the recent drop in oil prices. This gives the Fed license to wait on further hikes. Indeed, the Federal Open Market Committee left the Fed Funds Rate unchanged on Wednesday, with the accompanying statement noting that “the Committee will be patient as it determines what future adjustments to the target range for the Federal Funds Rate may be appropriate to support” the Fed’s “maximum employment objective and its symmetric 2% inflation objective.”


It may not look like it when one simply browses the headlines, but the current situation still has the potential to shape up as a revival of the Goldilocks environment that prevailed in 2017 and in the early part of 2018. With the Fed on hold for the time being, the US government shutdown now behind us, and the no-deal Brexit possibility voted down, this week may well be positively counted in terms of policy signals. In light of this, we’re taking this opportunity to affirm our slightly risk-on positioning for the year.

Definitions

Capital expenditure (“capex”) – company funds used to acquire, improve and maintain physical assets, including property, buildings and equipment.

Consumer Confidence Index – an index issued by The Conference Board, measuring consumers’ near-term economic optimism or pessimism. If consumers are optimistic, they tend to buy more goods and services, which can stimulate the economy.

Economic cycle – the fluctuation of the economy between periods of growth and periods of recession.

Fed Funds Rate – the interest rate at which depository institutions, such as banks, lend reserve balances to other depository institutions overnight; an important financial-market benchmark.

Federal Open Market Committee (“FOMC”) – a committee in the Federal Reserve System (the “Fed”), which is charged by law to oversee the open-market operations of the United States. The FOMC makes decisions about interest rates and the US money supply.

 

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The views expressed in this material are the views of Simona Mocuta through the period ended 01/30/2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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