The Slowing U.S. Economy Is No Longer a Surprise… Moody’s Warns on Outlook for Global Banks… Gundlach: A Recession Will Come, Start ‘Playing Defense Right Now’

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The slowing economy is no longer a surprise: Morning Brief

The U.S. economy is slowing.

This was confirmed by service-sector data and labor market data released on Wednesday.

But the economy’s trajectory is no longer a surprise to investors and no longer has markets bracing for a recession to break out just around the corner.

In November, the Institute for Supply Management’s reading on service sector activity fell to 53.9 from 54.7 in October. Readings above 50 indicate expansion in the sector while readings below indicate contracting activity. The ISM said in its report that “respondents hope for a resolution on tariffs and continue to be hampered by constraints in labor resources.”

Gundlach: A recession will come, so investors should start ‘playing defense right now’

Billionaire bond investor Jeffrey Gundlach believes that even though recession risks have fallen, now is the time for investors to be “playing defense.”

The U.S. economy has weathered the uncertainty of a full-fledged trade war between the world’s two largest economies far better than most economists expected. Yet even with a proactive Federal Reserve and a strong labor market, the CEO of $150 billion DoubleLine Capital believes a downturn is more a question of “when” than “if.”

The U.S. is “battling tooth and nail the next recession,” Gundlach told Yahoo Finance in an exclusive wide-ranging sit-down. “The Fed has done, and the central banks, everything they can to avert the next recession. But a recession will come.”

After Gundlach successfully played defense in 2007 and 2008, he went on offense in 2009 and put capital to work in the beaten-down mortgage bond sector and reaped the benefits.

“[When] the opportunity comes, you’ll want dry powder to pounce on it,” he said. Gundlach emphasized investors need to be playing defense now, just like investors should have done so in 2006.

“I think playing defense is early. You probably should’ve started playing defense in 2018. And the fact that 2019 has been really good is just a better reason to play defense.”

Moody’s Warns on Outlook for Global Banks, Citing Trade Tensions

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Moody’s Investors Service downgraded its outlook for global banks, citing slowing growth, low interest rates and volatile operating conditions.

The ratings firm changed its outlook on the sector to negative from stable, it said in a report published Thursday.

Trade tensions between the U.S. and China “appear entrenched, with negative consequences for banks in those countries as well as in other export-oriented economies and for banks funding trade,” Moody’s said.

 

The Repo Market Is ‘Broken’ & Fed Injections Are Not a Lasting Solution

The Federal Reserve’s ongoing efforts to shore up the short-term “repo” lending markets have begun to rattle some market experts.

The New York Federal Reserve has spent hundreds of billions of dollars to keep credit flowing through short term money markets since mid-September when a shortage of liquidity caused a spike in overnight borrowing rates.

But as the Fed’s interventions have entered a third month, concerns about the market’s dependence on its daily doses of liquidity have grown.

“The big picture answer is that the repo market is broken,” said James Bianco, founder of Bianco Research in Chicago, in an interview with MarketWatch. “They are essentially medicating the market into submission,” he said. “But this is not a long-term solution.”

This chart shows the more than $320 billion of total repo market support from the Fed since Sept. 17, when for the central bank began pumping in daily liquidity after overnight lending rates jumped to almost 10% from nearly 2%.

Repo Turmoil Prompts U.S. Regulators to Scrutinize Market Dangers

A full scale review by regulators, who identified disruptions to short-term funding markets as a potential risk to the U.S. financial system.

 

The market will need the Federal Reserve again in 2020

The No.1 risk to the stock market continuing its outperformance next year is not President Trump or consistently weak U.S. economic data or even China, senior analysts at John Hancock Investment Management say, but whether or not the Fed continues to stimulate the economy through what they call “not QE.”

What it means: Fed chair Jerome Powell has insisted the central bank’s bond buying program — initiated after rates in the systemically important repo market spiked to five times their normal level in September — is not quantitative easing.

  • But “it walks and talks” like QE, analysts say, and has injected close to $1 trillion of liquidity into the repo market and added more than $260 billion to the Fed’s balance sheet.

The intrigue: The new “not QE” program was “like a fourth rate cut this year,” John Hancock co-chief investment strategist Matthew Miskin said during a media briefing Tuesday in New York. And it has given a boost to the stock market.

The big picture: “The equity market has benefited from a super aggressive Fed,” Ethan Harris, head of global economics at Bank of America Merrill Lynch, told Axios during a separate event Tuesday at BAML headquarters.

  • “I mean the Fed basically anesthetized the markets to the trade war escalation this summer.”
  • Because the Fed was able to mask the economy’s pain from the market, a strong sell-off may be needed to motivate the Trump administration to secure what Harris calls a “skinny” trade deal with China and avert the Dec. 15 tariffs that will hit billions of dollars worth of consumer goods.

The converse is also true, Miskin argued.

  • “If things turn more sour because we’re not getting a trade deal or the tariffs go on Dec. 15, the stress underpinning … the market will re-emerge and the Fed’s definitely going to have to be there,” he told Axios.
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