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World Economy, Shutdown Deadline Take Center Stage

February 13, 2019

 

Overview: With a light supply of significant economic reports, investors were mostly focused on bigger picture events over the past week. Surprises were scarce and mortgage rates ended with little change.

The three-week temporary spending bill which reopened the U.S. government on January 25 will expire on Friday at midnight, and lawmakers have been scrambling to agree to a longer-term deal to prevent another shutdown. On Wednesday morning, the two parties in Congress were close to reaching a compromise, but it still was uncertain what the final details would be and whether President Trump would sign it.

 

Several other geopolitical issues also have been holding the attention of investors. First, the outlook for global growth has been falling. While the forecast for U.S. gross domestic product (GDP) growth in 2019 has held relatively steady at around 2.5%, many other regions have been downgraded recently. For example, the primary governing body for the European Union (EU) reduced its forecast for 2019 GDP growth in the EU from 1.9% to 1.3%. Second, little has been revealed about the amount of progress made in the trade negotiations between the U.S. and China. U.S. tariffs are set to be increased again on March 1 if no deal is reached. Finally, the British exit from the EU (Brexit) is scheduled to occur on March 31, and a high level of uncertainty remains about what the terms of the departure will be.

 

The latest data released this week continue to show little change in core inflation over recent months. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services, and the core reading excludes the volatile food and energy components to provide a better indication of the underlying trend. In January, core CPI was 2.2% higher than a year ago, the same annual rate of increase as last month. This matched expectations and caused little reaction.


Week Ahead 

Looking ahead, the Retail Sales report will be released on Thursday. Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a key indicator of growth. The Industrial Production and Capacity Utilization report , another important indicator of economic activity, will come out on Friday. The minutes from the January 30 Federal Reserve meeting will come out on February 20. These detailed minutes provide additional insight into the debate between Fed officials about future monetary policy and have the potential to move markets. The Existing Home Sales report will be released on February 21. Mortgage markets will be closed on February 18 for Presidents Day.

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