A blowout December jobs report and soothing comments from Federal Reserve Chair Jerome Powell calmed Wall Street late last week.
Markets had been on edge due to concerns the trade war is starting to have an economic impact. A report on manufacturing pointed to the industry growing at its slowest pace since November 2016, and the report revealed comments from purchasing managers that they were concerned about the effect of tariffs.
Also last week, Apple warned that its revenue would be much lower than expected mostly due to iPhone demand in China. Some analysts attributed the slower sales as a byproduct of the trade war.
Fortunately, the December jobs reports eased the anxieties that the economy is slowing, as it showed a labor market that is in excellent shape. There were 312,000 new jobs spread across nearly all industries in December, which was much better than the 184,000 new jobs economists expected.
While the unemployment rate increased from 3.7% to 3.9%, it did so because more people were looking for jobs, not because people lost jobs.
The upcoming week is packed with important economic data, including reports on services, job openings, and inflation. Also, face-to-face trade talks between the U.S. and China kicked off Monday and will continue through Tuesday.
In December, the Federal Reserve (Fed), our nation’s central bank, suggested two rate hikes in 2019 were possible. Chair Powell at that time also indicated the “balance sheet” unwind would stay on course. In other words, Powell’s message was that of inflexibility.
In an interview last Friday however, Powell wisely changed his tone. Powell said that the Fed’s policy is flexible, which refers to both less interest rate hikes and possible adjustments to the balance sheet if necessary. He also said the Fed is listening to what the market is saying.
The Simply Money Point
While economic growth is expected to slow down (but remain positive), the strong labor market will support consumer spending and the economy. Economists expect the U.S. economy to grow around 2.0 – 2.5% in 2019.
The Fed’s newfound patience when it comes to slowly increasing interest rates should also be considered encouraging. If the Fed stays on this new course, it reduces the risk that they could force the economy into a slowdown.