AIIS February 2019 Steel Market Update

SEATTLE (Scrap Monster): The Federal Reserve appears to be backing off its plan to continue to raise interest rates.

At least two increases to the target range for the federal funds rate had been expected this year, but following the Federal Open Market Committee’s Jan. 29-30 meeting, it was announced that, not only will the committee keep rates at 2.25 to 2.5 percent, it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”

This was the first post-meeting statement since 2015 that did not convey the Fed’s intention to implement “further gradual increases” in interest rates. Since late 2015, the FOMC has raised rates nine times, most recently in December.

Despite this shift in monetary policy, the Fed did not express any wariness regarding a recession. It stated that “economic activity has been rising at a solid rate” and said that it “continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.”

In February, Federal Reserve Chairman Jerome Powell rejected concerns that the possibility of a recession “is at all elevated.” He noted, though, that economic growth has been uneven across the country and “poverty remains a challenge in many rural communities.”

“Rural areas where traditional industries are declining and where new employers may be moving in often experience a mismatch between the skills of local workers and those demanded by the new employers,” Powell said.

While the Fed is not warning of a recession, some others see the potential for one. JP Morgan Chase CEO Jamie Dimon in January, for example, cautioned vaguely that “the range of [economic] possibilities is broader and the range of bad outcomes is increasing.”

“The U.S. economy is kind of like a ship,” Dimon said. “Then you have all this other noise, geopolitical noise, Brexit noise, what’s the Fed going to do … shutdown, trade. They’re kind of buoys in the water in front of that ship. Eventually that may very well cause a slowdown or a recession.”

Ray Dalio, co-CIO and co-chairman of Bridgewater Associates, said he sees a “significant risk” of recession next year.

“It’s going to be globally a slow up,” Dalio said. “It’s not just the United States; it’s Europe; and it’s China and Japan. … Where we are in the later [economic] cycle and the inability of central banks to ease as much, that’s the cauldron that will define 2019 and 2020.”

Analysts at Goldman Sachs, meanwhile, “don’t see a recession, but we do see a pretty sharp slowdown,” the firm’s chief global equity strategist, Peter Oppenheimer, said.

During the first three quarters of 2018, the economy grew at annualized rates of 2.2 percent, 4.2 percent and 3.4 percent, raising the possibility that a strong fourth quarter could result in the first year of 3 percent growth since 2005. The Q4 number is still unknown, however, because the recent government shutdown prevented the Bureau of Economic Analysis from producing the gross domestic product report that was to be released in late January. The fourth quarter report is now scheduled to be released on Feb. 28.

The Bureau of Labor Statistics was not affected by the shutdown, and the agency announced that, in January, the economy added 304,000 jobs while the unemployment rate crept up to 4 percent.

“Job gains occurred in several industries, including leisure and hospitality, construction, health care, and transportation and warehousing,” the bureau reported.

Confidence in the manufacturing sector remains fairly strong, with the Institute for Supply Management’s Purchasing Managers Index increasing 2.3 points to 56.6, which was 1.9 points below the average for 2018.

“Comments from the panel reflect continued expanding business strength, supported by strong demand and output,” the chair of ISM’s Manufacturing Business Survey Committee said.

Some members of the panel noted the presence of negative factors, even amid the overall good conditions, including one who observed that “steel tariffs continue to put upward pressure on prices of downstream materials.”

Consumers, meanwhile, felt less confident in January than they did in December, according to The Conference Board’s Consumer Confidence Index, which fell from 126.6 to 120.2. The board’s senior director of economic indicators said that “financial market volatility and the government shutdown appear to have impacted consumers.”

“Shock events such as government shutdowns (i.e., 2013) tend to have sharp, but temporary, impacts on consumer confidence,” she said. “Thus, it appears that this month’s decline is more the result of a temporary shock than a precursor to a significant slowdown in the coming months.”

The University of Michigan recorded a significant decline in its Index of Consumer Sentiment from 98.3 in December to 91.2 in January, the lowest level since Donald Trump’s election as president. The survey’s chief economist, like his counterpart at The Conference Board, noted the negative effects of the shutdown and said, “The typical impact of such ‘crisis’ events is short lived, with consumers quickly regaining lost confidence.”

Existing home sales fell 6.4 percent from November to December, according to the National Association of Realtors, with the median existing home sales price at $253,600, a 2.9 percent increase from a year earlier.

“Softer sales in December reflected consumer search processes and contract signing activity in previous months when mortgage rates were higher than today,” the association’s chief economist said. “Now, with mortgage rates lower, some revival in home sales is expected going into spring.”

Housing starts data for December are not yet available because of the shutdown.

The Dow Jones Industrial Average ended January at 24,999.67, a more than 7 percent increase for the month following a stagnant 2018. The S&P 500 Index on Jan. 31 closed at 2,704.10, recording a 7.9 percent monthly gain.

The dollar closed January trading at 0.87 euros, 0.76 pounds, 108.87 yen and 6.7 yuan.

The federal government’s 35-day shutdown will cut into growth for both the fourth quarter of last year and the first quarter of this year. Even when the government is fully operational, the uncertainty that accompanies a dysfunctional policy-making process is, generally, not good for business. And, of course, the Trump administration’s steel tariffs and other aspects of its protectionist trade policy continue to stifle growth. It is impossible to calculate just how many billions of dollars in output have been lost to such easily avoidable factors. If the current expansion ends this year or next, the economy will not have died of natural causes; it will have been murdered.

Courtesy: AIIS