Market Volatility Elevated Amid Concerns Of Tighter Monetary Policy

Broad market volatility remained elevated in November amid ongoing concerns of tighter monetary policy, U.S./China relations, and the slowdown in global growth that may result from these matters. The U.S. economy continues to grow at an above trend rate, bolstered by tight labor markets and strong consumer spending. At the same time, the current expansion is now at 113 months, the second longest streak since World War II and close to besting the 1990s expansion at 120 months.

As we have repeated several times, business cycles do not run on clocks, but it is natural for market participants to expect a cycle shift (or at least deceleration) soon. The current expansion received a great deal of support from massive Fed accommodation (0% rates and asset purchases) and, more recently, fiscal stimulus (tax cuts and deficit spending). The former is now reversing and moving toward neutral, and the benefits of the latter are beginning to fade, particularly with looming trade issues threatening to offset stimulus efforts. As such, the market’s focus on Fed policy and trade should not be surprising.

November At-A-Glance

• Financial markets remained volatile in November on concerns of tighter monetary policies, U.S./China trade relations, and slowing global growth.
• Fed Chair Powell appeased the markets by tempering the perceived hawkishness of his October comments.
• The minutes of the November FOMC meeting foreshadowed an adjustment to the Fed’s forward guidance in the December statement, placing a greater emphasis on data dependency; another technical adjustment to IOER is also likely in December.

For much of November, there had been a particular focus on Fed Chair Jerome Powell’s comments from October 3, which we referenced in last month’s commentary. In the speech, Powell opined that the current policy rate is a long way from neutral probably. The market seemingly ignored the qualifier at the end of that statement and perceived it to be a hawkish shift from the Fed leader.

Fedspeak since the September FOMC meeting had been fairly consistent, suggesting that 1) gradual policy normalization remains appropriate, 2) policy rates may move beyond neutral (into restrictive territory), and 3) policymakers don’t know with certainty what the neutral policy rate is. While the honesty regarding neutral rate certainty (or lack thereof) that Powell and his colleagues shared in October was refreshing, markets don’t always respond well to such ambiguity. As such, there was a growing expectation for Powell to temper his October 3 comments.

On November 28, Powell effectively did so in a speech before the Economic Club of New York. Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy, said Powell. The just below neutral language was enough to spark a 2.3% rally in the S&P 500, and front-end Treasury yields fell 2-3 bps (curve 3 bps steeper). While the markets responded positively to Powell’s comments, the differences between what he said on 10/3 and 11/28 were more nuanced.

This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.

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