Economic Update - J.P. Morgan Asset Management

Economic Update

Contributor Dr. David Kelly

Denotes updated information

Growth Icon (Orange)  Growth

The second estimate of 3Q U.S. GDP growth remained at 3.5% q/q saar, decelerating from the 4.2% pace in 2Q. The initial estimate showed a surge in inventory growth, which contributed even more to overall GDP growth per the second estimate, but was offset by a deeper detraction from net exports. Still, robust activity is reflected in recent data. Markit PMI only eased slightly to 55.3 and ISM manufacturing jumped to 59.3, both reflecting solid new orders.

Jobs Icon (Orange)  Jobs

Nonfarm payrolls increased by 155,000 jobs in November, below expectations of 198,000. Despite this disappointing reading, wage growth, the unemployment rate and the labor force participation rate remained unchanged, providing an overall stable report reaffirming a healthy U.S. economy amidst a jittery stock market. Furthermore, steady wage growth avoided stoking inflation fears, likely leading the Fed to proceed on its measured hiking path.

Profits Icon (Grey) Profits

With 465 companies having reported (95.3% of market cap), our current estimate for 3Q 2018 earnings is $41.64 ($33.26 ex-financials), and 78% of companies have beaten on earnings while 49% have beaten on revenue. Despite initial concerns of peak earnings in 2Q18, 3Q18 earnings surged to a 32.9% y/y growth rate thanks in part to tax reform, but also to healthy economic conditions (strong consumer spending, higher oil prices, and robust pricing power) which more than offset the headwinds (stronger dollar and rising wages, raw materials and interest costs).

Inflation Icon (Grey)  Inflation

Headline PCE, the Fed's preferred inflation measure, held at 2.0% y/y in October. Core PCE fell slightly to 1.8% y/y from 2.0%. Headline CPI increased in October by 0.3% m/m and 2.5% y/y, pushed up by high oil prices, which have since receded significantly. Core CPI came in relatively steady from last month at 0.2% m/m and 2.1% y/y. Overall, inflation continues to be very stable.

Rates Icon (Grey)  Rates

Fed Chair Jay Powell commented that interest rates are “just below” neutral, walking back his recent prior comments that “we’re a long way from neutral at this point.” This allayed fears that the Federal Reserve will tighten monetary policy into restrictive territory. As expected, the Fed did not hike rates in November, maintaining its target range for the federal funds rate at 2.00%-2.25%. This suggests one additional rate hike at the mid-December meeting, and two more in 2019.

Risks Icon (Grey)  Risks
  • Trade tensions may result in a slowdown in global growth.
  • The Federal Reserve may tighten monetary policy too aggressively.
  • Weak labor force growth could hinder economic growth in the future.
Investment Themes Icon (Grey)  Investment Themes
  • Risk assets have reasonable valuations and momentum heading towards the end of this cycle.
  • Credit and short duration tend to perform well late cycle, while core fixed income protects heading into a downturn.
  • Long term growth prospects and cheap absolute and relative valuations support international equities.
Weekly Economic Update (December 10, 2018)
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The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.

Data are as of December 10, 2018

Past performance does not guarantee future results.

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