We heard last week from U.S. Federal Reserve Board Chair Jay Powell, who
noted he is seeing “concerning” signs of a global slowdown. Recently the
People’s Bank of China warned of a slowdown as well. And prickling thumbs
were not needed to see that gross domestic product (GDP) in the eurozone
declined to 0.2% in the third quarter, just 1.7% year-on-year. This
contrasts starkly with 0.4% rates of growth for both the first and second
quarters, and a 2.7% annualized pace for the fourth quarter of 2017.
Adding to the negative picture was last month’s increase in eurozone
inflation, which rose to an annual rate of 2.2%, up from 1.4% a year
earlier.* This may make it more difficult for the European Central Bank to
remain on course to end tapering at the end of 2018. Given that last year’s
global growth provided an important tailwind for the U.S. economy, it makes
sense for the Fed to be on alert and closely monitoring the global growth
More troubling was what Jim Cramer shared last week on his CNBC show: “So
many CEOs have told me about how quickly things have cooled.” He added: “So
many of them are baffled that we could find ourselves in this late-cycle
dilemma that wasn’t supposed to occur so soon.”
The Fed looks poised to respond to a slowdown
I have worried for some time that the growing trade wars and central-bank
tightening would conspire to cause a tangible, albeit modest, slowdown in
global growth. The good news is that the Fed finally seems to be concerned
– and poised to act.
Recall that the stock market wasn’t sure what to make of the Powell-run Fed
– hence the selloff in February as the baton was being passed from former
Fed Chair Janet Yellen to Powell. Until last week, it wasn’t clear that the
Fed under Powell was still data-dependent, given the more rapid and regular
pace at which rates were raised this year.
Last week’s comments by Fed Vice Chair Richard Clarida were very important,
as he confirmed in an interview that the Fed is still data-dependent.
What’s more, Clarida shared the view that the Fed is near neutral, which
seemed to contradict Chair Powell’s recent comments that the Fed is a “long
way” from neutral. Clarida’s comments came a day after Atlanta Fed
President Raphael Bostic articulated the view that the Fed should take a
“tentative approach” to raising rates given their proximity to the neutral
level. This also comes the same week that Philadelphia Fed President
Patrick Harker said that he was “not convinced” a December rate hike is
This is further confirmation of what I have expected. I believe that while
the Fed is likely to raise rates in December, it is likely to take its foot
off the accelerator to some extent in 2019. And the fall in U.S. Treasury
yields at the end of last week suggests other investors are starting to
suspect the same thing. Quite frankly, now that we are beginning to get the
scent of a possible slowdown, I believe this is a good time for the Fed to
begin communicating to investors that it is data-dependent and ready to
respond to weaker data.
Geopolitical headwinds have continued to play out
Of course, there are a number of negative headwinds that could have an
impact on global markets, including Italy’s budget and the Brexit debacle.
We were taken on another roller coaster ride last week as U.K. Prime
Minister Theresa May announced an agreement for leaving the European Union.
This announcement was followed by the resignation of several members of her
cabinet (most notably, the Brexit minister), as well as building momentum
in the movement to vote “no confidence” on May.
I happened to be in London last week to watch this unfold first-hand. I
asked my cab driver what he thought of the Brexit deal that May was
promoting. He responded, “You’re from America, right? Tell me this: Do the
turkeys vote for Thanksgiving in America?” He went on to explain that he
doesn’t want a Brexit and wouldn’t want a “yes” vote on this plan. Now,
admittedly, as a London cabbie, he benefits from greater international
trade and tourism – but he suspected many others outside London were also
starting to recognize they benefit from the same.
I can’t help but wonder if we ultimately will see another Brexit referendum
held in the U.K. After all, knowing what they know now, British voters may
vote differently if the referendum were held today. In the meantime, the
impending Brexit has been causing market turmoil. The pound sterling fell
last week, as did the FTSE 250 Index. I believe this was a knee-jerk
reaction to the dramatic events of last week and the growing uncertainty of
the Brexit situation, but I expect we will see a recovery when we get
This week, we will want to monitor five key issues.
1. Trade developments.
I had held out hope last week that the trade situation would improve based
on U.S. trade advisor Peter Navarro’s comments that it seemed that
“globalists” were making progress in changing President Trump’s mind on the
burgeoning tariff war with China. However, based on this past weekend’s
Asia-Pacific Economic Cooperation meeting, I expect the trade situation to
deteriorate. The U.S., represented by Vice President Mike Pence, and China,
represented by President Xi Jinping, exchanged barbs and couldn’t even
agree on a non-binding statement at the conclusion of the meeting. I don’t
expect anything constructive to come out of the Trump-Xi trade talks at the
upcoming G20 meeting.
2. Possibility of a U.S. government shutdown.
Markets appear poised to sell off significantly if the U.S. government
shuts down on December 7. While a shutdown seems unlikely at this juncture,
the situation could change quickly – so we will want to follow it closely.
3. Congress’ vote on the U.S.-Mexico-Canada Agreement (USMCA).
There are concerns that the USMCA is in jeopardy, given rumblings that some
members of Congress will oppose it for varying reasons. I think the USMCA
will ultimately be passed, but some small alterations will likely be made
in order to appease enough lawmakers.
4. Falling oil prices.
There continue to be concerns about lower oil prices. It looks like oil
prices may remain lower for longer, which means investors need to
contemplate the implications. For example, lower oil prices will have
different implications for different countries, depending on whether they
are oil-exporting or oil-importing. And lower oil prices, all else being
equal, should ease cost pressures for the chemical industry, which uses oil
as a key ingredient.
5. The tech sector.
The tech sector continues to come under very significant pressure, helped
by growing concern that the sector – particularly the FAANG stocks – will
come under greater regulation. I talked about this as a potential outcome
from the midterm elections, and I believe it’s more likely than ever.
However, it is not a reason for investors to abandon the tech sector, but
instead could represent a selective buying opportunity.
* Source: Eurostat, as at Nov. 16, 2018.
is Global Market Strategist at Invesco. This article first appeared in
the Invesco blog.
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In a “no-deal” Brexit, the U.K. would leave the EU in March 2019 with no
formal agreement outlining the terms of their relationship.
The FTSE 250 Index represents mid-cap stocks listed on the London Stock
Gross domestic product is a broad indicator of a region’s economic
activity, measuring the monetary value of all the finished goods and
services produced in that region over a specified period of time.
FAANG stocks refer to Facebook, Apple, Amazon, Netflix and Google (now
The opinions referenced above are those of Kristina Hooper as at Nov. 19,
2018. These comments should not be construed as recommendations, but as an
illustration of broader themes. Forward-looking statements are not
guarantees of future results. They involve risks, uncertainties and
assumptions; there can be no assurance that actual results will not differ
materially from expectations.
This does not constitute a recommendation of any investment strategy or
product for a particular investor. Investors should consult a financial
advisor/financial consultant before making any investment decisions.
Investors should always consult their own legal or tax professional for
information concerning their individual situation. The opinions expressed
are those of the author(s), are based on current market conditions and are
subject to change without notice. These opinions may differ from those of
other Invesco investment professionals.
© 2018 Invesco Ltd. All rights reserved. Used with permission.