FAQs on the Markets and Economy
Will a Brexit deal be reached?
After three years of agonizing debates, Brexit continues to supply plenty of twists and turns.
The failure of Prime Minister Boris Johnson to fast-track his Withdrawal Agreement Bill through Parliament has made meeting the quickly approaching October 31st deadline now unlikely. Still, for the first time in this long process, UK lawmakers have agreed on a way forward.
In the meanwhile, European Council President Donald Tusk has signaled he will recommend the UK is granted a “flextension” that would combine a longer period (likely to end January 2020) with an early termination option in the event that PM Johnson is able to get his deal passed sooner.
Several hurdles remain which will likely contribute to market volatility in the near term. Though expected, EU member states must still agree to another extension. An extension could also provide Parliament with time to amend the bill, jeopardizing the hard won consensus. Alternatively, Johnson could call for a general election and risk putting forth the deal - which polls well at present- to his countrymen at the ballot box.
Despite all these lingering questions, we finally appear close to the finish line and odds now are good that the UK leaves the EU with a deal. Most economists and business groups think a no-deal scenario would be disastrous and uncertainty around the issue continues to weigh on what is an already struggling European economy.
Our material underweight to European equities, based on our proprietary 4Ps framework, reflects this reality among other long term structural challenges for the region.
Are EM Asia Equities still attractive?
We believe fundamentals remain supportive and indicate that EM Asia equities could be poised to begin another cycle of outperformance.
Although trade concerns may keep markets volatile in the near term, recent developments in U.S.-China negotiations have offered encouragement that a more damaging trade war will be avoided.
At the same time, policy across the region has turned more supportive this year through fiscal and monetary stimulus. The Fed’s recent dovish turn is also a positive, helping take pressure off EM central bankers, strengthening Asian currencies and reducing costs on emerging market companies with dollar-denominated debt.
For investors, EM Asia boasts a superior earnings growth profile, particularly compared to other non-U.S. developed markets. Valuations also look more attractive relative to other geographies.
Longer term, our proprietary 4Ps framework analysis continues to indicate that the investment opportunity is compelling. The region’s strong growth outlook remains resilient, supported by rising income growth, robust demographic and urbanization trends, and high investment rates.
Our focus is on sectors and companies in Emerging Asian economies that should benefit from these domestic structural drivers of demand rather than those exposed to trade headwinds.
To learn more about EM Asia Equities, watch our Emerging Markets Equities: Go East For Growth on our Insights page.
Will the Fed cut the federal funds rate at their upcoming October 30 meeting?
That is a tough question. The way in which the federal funds futures market is trading, it implies at least one more cut this year (see chart). The Fed only has two meetings left this year: the October meeting and one other in early December.
That view is different from what the Fed thinks. Based on their projections for this year, released last month, the Fed has no plans to change the federal funds rate this year or even next year. In 2021, they plan to boost it by 25 bps.
But this is a fast changing world. Since the last Fed meeting in mid-September, the outlook for global growth has fallen, due mainly to the slowdown in global trade. Domestically, the pace of weakening in the manufacturing sector has increased and the pace of growth in the service sector, although positive, continues to weaken.
Statements from Fed policy makers in the past few weeks are all over the board. Some want to ease again while others want to wait to see the impact from the two cuts the Fed has recently made.
We believe the Fed will cut rates one or two more times this year.
Was the weak retail sales report a concern?
Retail sales for September was disappointing, dropping 0.3% when the market was expecting a 0.3% increase. This marked the first decrease in seven months (see chart).
We think it is premature to believe this decline is pointing toward a significant weakening in consumer demand.
For six months, spending held up remarkably well despite the significant pessimism generated by conflict in Washington, trade tensions and the global economic slowdown. We do not know why spending pulled back in September. It could be due to consumers’ reducing their spending because of the overwhelming bad news, or it could simply be a pullback in the very strong spending pace that may have been elevated as consumers were trying to beat post-tariff imposed higher prices. It will take a month or two of additional data to find out.
Spending is based heavily on consumers having money and/or access to money. With a low unemployment rate, wage gains above inflation and ample access to credit, spending should continue to grow.
Have lower interest rates helped the housing sector?
Mortgage rates have fallen significantly since hitting a recent peak last November. The rate on 30-year fixed-rate mortgage stands at 3.75%, down 107 bps from that peak.
Since June, mortgage rates have been below the 4.0% threshold, a level that tends to stir interest in buyers. The lower mortgage rates, along with increased pent up demand, has excited home builders.
The index of the National Association of Home Builders just hit 71 and has been increasing since last December (see chart). It is well above the average reading of 47 for this expansion and is just below the cycle high of 74 reached in December 2017, which also happens to be the highest level reached since 1999.
Besides lower interest rates, there are other underlying fundamentals that are helping the housing market. There is a shortage of supply, declines in the unemployment rate, rising income and more household formations.