April 9, 2019
On Friday, President Trump called for the Fed to cut key interest rates and resume quantitative easing to stimulate economic growth. I should add that President Trump seems very frustrated with the current pace of economic growth. Herman Cain is his latest nominee for the Fed, so between Stephen Moore and Herman Cain, President Trump wants to place two of his allies on the Federal Open Market Committee.
Currently, the Fed is still conducting quantitative tightening as it shrinks its balance sheet. Normally, there is no need to do quantitative easing when interest rates are positive, but when key interest rates approach 0% or negative – like they are in the Eurozone – then quantitative easing is a “last resort” to stimulate economic growth. Frankly, I expect the FOMC will ignore the President’s call for quantitative easing, as he seems to just be setting up Chairman Powell to be a scapegoat for the economic slowdown.
The Treasury yield curve is no longer inverted but it remains remarkably flat and could invert again if there is another Brexit-related crisis. Over the last few months, British Members of Parliament (MPs) have voted “no” on virtually every Brexit proposal and essentially refuse to implement the referendum that British citizens voted for nearly three years ago, so another referendum may be forthcoming.
The truth of the matter is that the MPs do not want to leave the European Union (EU) and are ignoring the will of the people. In the meantime, more members of Prime Minister Theresa May’s cabinet continue to resign, so it is just a matter of time before she also resigns. The bond market remains hypersensitive to any Brexit developments. In the interim, foreign capital is pouring into the U.S., suppressing Treasury yields.
Most Economic Statistics Show a Slight Slowdown in 2019
The economic news last week was mixed and mostly down, but let’s start with the good news. The Institute for Supply Management (ISM) announced that its ISM manufacturing index rose to 55.3 in March, up from 54.2 in February. This was a pleasant surprise, since economists were estimating that the ISM manufacturing index would come in at 54.6. The new orders component rose to 57.4, up from 55.5 in February. Fully 16 of the 18 industries surveyed expanded in this very upbeat manufacturing report.
On the flip side, on Wednesday, ISM announced that its ISM service index declined to 56.1 in March, down from 59.7 in February, making March the lowest monthly reading for the service sector in 19 months. Any reading over 50 signals an expansion, so the service sector is still growing, just a bit slower.
This service sector slowdown was reflected in the Commerce Department’s report that retail sales fell 0.2% in March, the second decline in the past three months. Abnormally cold weather was blamed for the decline, but January retail sales were revised to a 0.7% increase, up from 0.2% previously estimated. Such big revisions in retail sales indicate that severe winter weather can adversely impact how accurately statisticians calculate retail sales, but as the weather improves, sales data should become more reliable.
On Tuesday, the Commerce Department announced that durable goods orders plunged 1.6% in February, due largely to a 31% decline in commercial aircraft orders. Excluding transportation, durable goods orders rose a minuscule 0.1%. Core orders for durable goods declined 0.1% and have declined in five of the last seven months. There is no doubt that businesses are now more cautious after last year’s spending spree from the corporate tax cuts. Core orders have been flat in the past three months. It is imperative that Boeing resolve its 737 Max issues before durable goods can significantly improve. I am confident that the 737 Max software will be fixed soon, since Boeing does not want to jeopardize its massive order backlog.
(Navellier & Associates owns Boeing in managed accounts and our sub-advised mutual fund. Louis Navellier and his family do own Boeing in personal accounts and via an investment in the Navellier Mutual Fund.)
Finally, the Labor Department reported Friday that 196,000 payroll jobs were created in March, which was better than economists’ consensus expectation of 175,000. The February payroll was revised up to 33,000 from 20,000 previously estimated. The unemployment rate remained unchanged at 3.8%. Average hourly earnings rose by 0.1% or 4 cents per hour to $27.70 per hour in March. Wages have risen 3.2% in the past 12 months. The labor force participation rate declined to 63% in March from 63.2% in February.
Due to slow wage growth and falling labor force participation, this was deemed a very dovish payroll report. I should add that ADP reported on Wednesday that only 129,000 private payroll jobs were created in March – the weakest monthly increase in 18 months. Taken together, there is no doubt that job creation has slowed dramatically, so we are in the midst of a “Goldilocks” environment of steady economic growth and an accommodative Fed, which is great for continued low Treasury yields.