February 2019 – Monthly Commentary
February 2019
It would appear that economic pundits believe that the U.S. economy is either sustainably robust or faltering and on the verge of recession. Certainly, Central Bankers around the globe are suspiciously reassuring that economic growth is just right and in case things go awry, they stand ready and able to act. Much as Fed Chairman Powell did in his speech last month, European Central Bank President Mario Draghi gave a sobering assessment of the European economy, recognizing that business activity in the region has slowed materially. In response, he vowed to not raise interest rates in 2019 and to reimplement the Targeted Long-Term Refinancing Operation for the third time (TLTRO III). TLTRO is the program in which the ECB issues low cost loans to European Banks with the idea that the banks will turn around and relend the cash to borrowers, thereby stimulating growth. At least that is the stated goal of the program. In reality, the reimplementation is being put in place because the previous TLTRO is rolling off and the ECB needs to head off a funding crisis of their own creation. Despite the dovish turn in policy, we doubt that it will result in anything more than tepid growth in the region. As we’ve discussed on several occasions, we think that the problem with economic growth in Europe is structural. Monetary policy can provide a short term burst to activity but the socialist tendencies and high consumption tax will keep the economy from growing rapidly.
Also during the month, Bank of England Governor Mark Carney reversed his opinion of the consequences to the economy should the United Kingdom leave the European Union without an agreement on trade. In November, Carney opined that should a no-deal BREXIT come to pass, the economy could contract as much as 7% and the exchange rate for the Pound Sterling could fall as much as 25% against the Euro and the U.S. dollar. On Thursday he tempered that forecast saying that the economic impact would only be about half of what he originally forecast. Nonetheless, a contraction of economic activity on the order of 3% in the U.K. is likely to have repercussions for U.K. as well as continental Europe. At the time of this writing, with two weeks until the so called divorce date, no solution for an amicable split from the European Union exists. Ironically, the FTSE 100 is 5% higher, with interest rates and the value of the Pound Sterling marginally unchanged over the first two months of the year. One can only guess at the value of those markets one month from now.
Turning to the U.S., despite the “full court press” of dovish comments by the various members of the FOMC, economic growth continues to impress. On the last day of February, Q4 2018 GDP was released, showing 2.6% quarter-over-quarter growth, annualized. That outcome was surprising given that consensus was expecting at 2.2%. Even more impressive, when compared to the Q4 2017, growth for the period registered 3.1%. Moreover, that growth was achieved despite an abysmal month for stock prices and concern the economy was on the verge of recession. Despite that gloomy end to year, stocks have demonstrated impressive resilience, rallying 11% in the first two months of this year. That comes on the back of solid growth in fourth quarter earnings. Equity investors are again “climbing the wall of worry” investing in stocks despite the government closure that started the year and the on-again off-again trade negotiations between the U.S. and China. The big question is how investors will react when the U.K. and the Europe Union finally split.
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