Weekly Market Update – 10 February 2020

USA EMPLOYMENT SITUATION

Last Friday’s non-farm payroll report, compiled by the Bureau of Labor Statistics, was expected to count a net increase somewhere in the region of 155,000 for the month of January. In the event the count tallied substantially higher at 225,000.

Beginning in September 2010, January’s is the most recent in a series of 112 monthly gains. To put that run of form into perspective, the next longest run of gains only ever made it to 48 months.

USA ECONOMIC OUTPUT

The US economy is in reasonably good shape.

Early indications from the Bureau of Economic Analysis suggest that output grew by around 2.3% last year. That’s a moderate pace by US standards in the post-war period (the average is closer to 2.7%), but it is streaks ahead of other developed market economies.

By our reckoning, the US economy increased at something like 2.3% during January too. If that holds true for the rest of the year – a big if, of course, but the consensus is anchored around 2.0% – and if inflation holds somewhere close to the 2.0% target, nominal growth in the USA will come in between 4.0% and 5.0%. That’s the sweet spot as far as equity markets are concerned.

USA MONETARY POLICY

A little over a week ago, the Federal Open Market Committee opted to hold the upper limit for the Fed Funds target range at 1.75%. That was firmly in line with expectations.

The Committee judged the current stance of monetary policy to be ‘appropriate to support [a] sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective’.

Very few of us expect that to change in the foreseeable future – with the ‘foreseeable future’ extending as far as the middle of the year in our mind.

UK MONETARY POLICY

Meanwhile, Mark Carney’s last meeting of the Monetary Policy Committee was a far less predictable affair. In fact, it seemed to us that market participants had worked themselves into a rare tizzy in the week running up to the event. Futures prices reflected the likelihood of a 25 basis point cut at 55% and the yield on the 10-year gilt fell from 65 basis points to 52 basis points as the meeting neared.

We weren’t at all convinced that a rate cut was the most likely outcome. Just two members voted to cut Bank Rate with the usual suspects – Jonathan Haskel and Michael Saunders – failing to make a strong enough case.

Indeed, the majority on the Committee are just as impressed as we are by the lifted mood following December’s decisive general
election…

‘Domestically, near-term uncertainties facing businesses and households have receded. Surveys of business activity have picked up, quite markedly in some cases, and investment intentions appear to have recovered. Housing market indicators have strengthened and consumer confidence has increased slightly.’

We remain of the view that, while there is more muted hard data yet to be released – including estimates for Q4 GDP – last year’s late election marks a turning point for the British economy.

The outlook feels considerably brighter now.