The Fed: Timing is everything

The Fed: Timing is everything

The Fed raised its benchmark rate, along with financial markets' anxiety; U.S. headline growth for Q3 looked just OK, but the devil lurked in the details.

[We’re not] "sitting there saying we know for sure what's going to happen" [in 2019]
Federal Reserve Bank of New York President John Williams

The Fed: Timing is everything

The FOMC’s December 19th rate decision and economic forecasts were broadly in line with expectations of a 25 basis point (bp) hike and a downward revision of forward forecasts. But rapidly growing worries about growth in the month since its November meeting meant that the Fed’s slightly dovish tilt from its previous stance was seen by many as inadequate.

Among the clearest signals of the downdraft in growth expectations: yields of U.S. Treasuries. 30-year bonds, which had drifted downward all week, plunged below the psychologically important level of 3.0% about 25 minutes into Chair Powell’s post-meeting press conference. It then dipped as low as 2.956% the following day before rebounding somewhat to 3.015% by mid-morning December 21.[1] The 30-year Treasury bond is widely accepted as a barometer of expectations about long-term growth and inflation. Meanwhile, the closely-watched 10-year Treasury, whose yield had earlier this year been expected to push beyond 3.1% as U.S. growth surged, instead fell as low as 2.746% the day after the Fed decision before recovering to 2.796% mid-morning on December 21.

For insight and context from Legg Mason’s investment  managers on the Fed and global growth, explore Brandywine Global’s Take a Break, Mr. Powell and Western Asset’s  The Continuing Uneven Global Recovery.

U.S. growth: Good headlines, disappointing details

The  third, and most detailed, official 3Q report of U.S. growth came in strong, at a trailing-12-month rate of 3.4% -- only slightly below the consensus estimate of 3.5%. Personal consumption rose 3.5% over the same period and the Fed’s benchmark Core Personal Consumption Expenditure (PCE) inflation measure came in at 1.9% year-over-year.

But some related numbers were less inspiring, suggesting a possible sudden stall in corporate capital spending.  For November, capital goods non-defense new orders, ex aircraft and parts, fell -0.6% vs. October, confounding expectations of a 0.2% increase. Shipments in the same category also fell, -0.1% vs October, against expectations of a 0.2% rise.  Preliminary figures for overall durable goods orders rose 0.8% vs. October but fell well short of consensus forecasts. And durable goods ex transportation fell -0.3%.  

All this may help explain the continued plunge in crude oil prices.  Brent crude prices are now down some 37% from the October 3 peak to $53.75 per barrel (bbl).WTI crude is down nearly 40% to $46.21. Because falling prices are taking place in the context of a renewed U.S. embargo on Iranian oil and a Saudi pledge to cut production by about a million bbl per day, some observers believe crude oil prices also reflect a falloff in overall demand driven by flagging global  growth.

 


[1] Source: Bloomberg, December 21, 2018, 10:00 AM ET

Definitions:

The Federal Funds rate (Fed Funds rate, Fed Funds target rate or intended Federal Funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

The Personal Consumption Expenditures (PCE) Price Index and the PCE Deflator are measures of price changes in consumer goods and services; the measures include data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.

Top

Important Information

 

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is only for distribution in those countries and to those recipients listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the UK Financial Conduct Authority.

In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.

Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information Documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People’s Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:

This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.