The confluence of rising interest rates, a strong US dollar, declining oil prices, tariffs and heightened trade tensions is starting to take a toll on US industry. While we’re not ready to call an end to this extended business cycle, continued improvement from here will be harder to come by.
The unemployment rate in October held steady at +3.7%. Nonfarm payrolls grew by 250,000 versus expectations for 200,000. Average hourly earnings grew by +0.2% MoM and are now up +3.1% YoY. Weekly initial jobless claims numbers ticked higher throughout November, averaging 222,000 for the month.
US GDP grew at a 3.5% annualized pace in the third quarter of 2018, ahead of estimates, though down from Q2’s 4.2% rate. These are the strongest consecutive quarters of growth since 2014 and likely will set the high water mark for this business cycle. It’s anticipated that growth will ebb as the immediate effects of the tax cut and fiscal stimulus wane as we head into 2019.
Prices saw a bit of an uptick during October with producer prices (PPI) edging up +0.6% MoM (versus expectations for a +0.2% increase) while consumer prices (CPI) rose +0.3% MoM (meeting expectations). Ex-food and energy producer prices rose +0.5% MoM while core CPI ticked up by +0.2%. On an annualized basis the Producer Price Index is up +2.9% while the Consumer Price Index is +2.5% higher.
Housing appears to have topped out as rising mortgage interest rates have put a damper on the sector. The S&P CoreLogic CS 20-city home price index rose +5.15% YoY through September, its softest reading in two years. New Home Sales dropped -8.9% in October while Pending Home Sales dipped -2.6%. Housing Starts rose a lower than expected +1.5% (versus estimates for +2.2% growth) while Building Permits dropped -0.6%.
The so-called “alternative investment” space continued to struggle against a backdrop of slowing global growth, trade tensions between the US and China, a rising US Dollar, uncertain US interest rate policy and the ongoing Brexit saga. Interest rates around the world remain accommodative, propping up what would otherwise be failing corporations. Rising rates in the US are triggering volatility in equities while European markets remain plagued by the ongoing uncertainty around Brexit. All in all, a very difficult environment for many traditional “Alt” strategies.