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MACROECONOMICS


Q4 18 and the flattening yield curve spurred concern that the US was recession-bound. Many observers argue that the Federal Reserve made a policy mistake by hiking rates 25 bp in December. There is a difference between a bear market in equities (20% decline) and an economic contraction. It may feel awful as the economy slows from 4.2% in Q2 18 to around 2.4% (New York Fed GDP N o wc a st ) to 2.7% (Atlanta Fed's G D PNo w), but it is not a recession. Trend growth in the US is estimated to be a little less than 2%, given the labor force growth and productivity. Bloomberg survey median forecast is for the US economy to expand by 2.4% annualized pace in H1 19 before slowing toward 2.1% in H2.


Credit growth slowed in the last part of 2018. Most of it seemed to be related to both the commercial and residential real estate market. New issuance in the high yield


bond market dried up in December, and the leveraged loans were under pressure. In themselves, these might not be undesired developments, but if there are an indication of broader, less benign developments, it would be a different story. Globally, new


FX


The European Central Bank is also in the middle of a transition that will culminate with a new ECB President at the end of October 2019


corporate bond issuance slowed in Q4 18 to the lowest since the Great Financial Crisis as the slide in equities made for a less hospitable environment.


Above-trend growth, near full- employment, and real Fed funds near zero gives the central bank what used to be called a tightening bias. Officials explicitly recognize


that changing financial conditions and headwinds from slower growth abroad could be mitigating factors. Press conferences after every meeting increase the Fed's flexibility to act to the changing economic dynamics (data dependency). The index of Leading Ec o no m ic I nd i c a t o rs typically falls before the onset of an economic c on t ra c t i o n . It rose at an annualized pace of 4.4% in the six months through N o v em b er . Based on the information set at the end of the year, penciling in two rate hikes in


2019 prudent.


Te balance sheet norma l ization (now at its


terminal velocity of $50 bln a month) is controversial, with some of the biggest opponents of utilizing the central bank's balance sheet in the first place now leading the criticism of its unwind. Part of the confusion lies with the Federal Reserve.


It previously argued that


it was not the buying (flow) but the holding (stock) that made the asset purchases a powerful tool. It


FX TRADER MAGAZINE January - March 2019 11 seems


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