For investors, the year began in fear. The global economic slowdown, the yield curve, Fed policy, trade policy, and the partial government shutdown generated risk. Last week, the news was mixed. There is no sign that the budget stalemate in Washington will end soon. There were renewed reports that President Trump is considering imposing tariffs on all imported motor vehicles.

In the last couple of years, Nobel Laureate Robert Shiller has championed the idea of economic narratives. Economic data describe “the fundamentals,” but stories are often the key drivers of activity. Investors are currently faced with two competing narratives. 

Financial market volatility remained elevated in the first few days of 2019, but it’s much more palatable when it is to the upside. Market participants remained concerned about a number of issues (global growth, trade policy, dysfunction in Washington), and fear remains a key factor in the outlook. Whether that fear abates or intensifies will tell the tale.

The Federal Open Market Committee raise short-term interest rates for the fourth time in 2018 and signaled more to come in 2019, albeit most likely at a slower pace. Market participants overly focus on what the Fed will do instead of why the Fed will do what it does.

Nonfarm payrolls rose less than expected in November. The three-month average remained relatively strong, although below the pace of the first half of the year. That's not surprising. As the job market tightens, the number of available workers decreases.

The key phrase in Fed Chairman Powell’s speech to the Economic Club of New York was widely misinterpreted by thefinancial press and, in turn, the markets. That’s not unusual. The markets don’t do nuance. Stock market participants were likelylooking for an excuse to rally.

The recent data releases continue to suggest moderately strong economic growth in the near term and little threat of higher inflation. However, investors remain anxious about a wide range of issues.

The midterm election results were about as anticipated, with Democrats gaining control of the House and Republicans retaining control of the Senate. Peace, love, and everyone sings Kumbaya, right?

The year-over-year increase in average hourly earnings was a bit exaggerated in the October employment report, but the underlying trend is higher. Growth in nonfarm payrolls rebounded from the effects of Hurricane Florence, while Hurricane Michael “had no discernible effect,” according to the Bureau of Labor Statistics.

Real GDP rose at a 3.5% annual rate in the advance estimate for 3Q18, about as expected. However, there were a few surprises in the details. Consumer spending growth was even stronger than anticipated. However, business fixed investment was unexpectedly weak.

Periods of low market volatility (or complacency) are often followed by turbulent readjustments, including sharp intraday moves lower and higher. There has been a long list of concerns in the last few months: the November 6 election, tighter Fed policy, higher long-term interest rates, trade policy disruptions, risks to the global economy, labor market constraints, and so on.

It was the best of times, it was the worst of times. Why did the stock market fall? No reason, and every reason. There doesn’t need to be a catalyst. Sometimes the market is simply going to do whatever the market is going to do, but the list of worries was already there.

The United Stated Mexico Canada Agreement (USMCA), which must still be approved by Congress, is mostly the same as the old agreement, but don’t call it NAFTA 2.0. The agreement should not have much of an impact on overall economic growth or inflation, but it is a hurdle cleared.

Judging by incoming calls and emails, investors are becoming more concerned about the possibility of recession. The flatter yield curve may be partly to blame, but there are growing concerns about the impact of the president’s trade wars and Fed rate increases have created some anxieties.

There is currently little doubt that the U.S. and China are in a trade war, where retaliation begets retaliation. Conflicts with Mexico, Canada, and the European Union are effectively in a temporary ceasefire, but remain unresolved.

Federal Reserve officials will meet on September 25-26 to set monetary policy. It’s widely expected that the Federal Open Market Committee will raise the federal funds target range by another 25 basis points, to 2.00-2.25%.

Nonfarm payrolls averaged a 185,000 gain over the three months ending in August, a relatively strong pace considering that labor market constraints are more binding and reports of worker shortages are rising.

For financial market participants, the ten-year anniversary of the financial crisis will bring back a lot of bad memories, chiefly among them is the failure of Lehman Brothers (Sept. 15, 2008). In the weeks ahead, we’ll see retrospectives on the events that led to the crisis, the failure to predict how bad things would get, and how we should prevent a similar setback.

The minutes of the July 31-August 1 Fed policy meeting and Chairman Powell’s Jackson Hole speech reinforce the view that the central bank will raise short-term interest rates again on September 26. The pace of monetary tightening beyond that is unclear, reflecting a number of uncertainties.

The Kansas City Fed’s annual monetary policy symposium begins later this week in Jackson Hole, Wyoming. Around 120 people attend the conference, including central bankers from around the world. In the past, the Fed chair’s speech has often been a big deal for the financial markets.

Nonfarm payrolls rose less than anticipated in the initial estimate for July, but figures for May and June were revised higher. The unemployment rate edged down, but the trend has been relatively flat this year – at odds with the strong trend in nonfarm payrolls.

Real GDP rose at a 4.1%, annual rate in the advance estimate for 2Q18, about as anticipated. That followed a 2.2% pace in the first quarter (revised from +2.0%). Second quarter strength was concentrated in consumer spending (rebounding from a soft 1Q18) and a surge in agricultural exports (which may have been in anticipation of an escalation in trade tensions).

Recent economic data reports, while mixed, continued to paint a picture of a strengthening economy in 2Q18. This improvement, expected to be seen in the GDP report to be released this Friday, partly reflects a rebound from a “soft” 1Q18. Averaging the two quarters should show a robust pace of growth in the first half of the year.

Fed Chairman Jerome Powell will deliver his semi-annual monetary policy testimony to Congress on Tuesday and Wednesday, but he’s not expected to cover any new ground.

Nonfarm payrolls rose more than expected in June, but the unemployment rate rose and average hourly earnings rose moderately. That’s a seemingly sweet combination for investors. The economy remains strong, but not so much that the Fed has to slam on the brakes.

The year began with two key themes. The first was that the economy ended 2017 with a good deal of momentum that should have continued into early 2018. The second was that the outlook for the second half of the year was considerably more clouded, reflecting fiscal stimulus, more binding constraints in the labor market, and tighter monetary policy.

It was a relatively thin week for economic data. Housing starts rose 5.0% (±10.2%) in May – a strong gain, but not statistically significant. Single-family permits, the key figure in the residential construction report, fell 2.2% (±1.0%) in May, but were up 7.7% (±1.3%) from a year earlier.

As expected, the Fed raised short-term interest rates following the June 12-13 policy meeting. Investors were more concerned about the pace of future rate increases and the revised dot plot showed a median of four rate increases in 2018, although (as in the March plot), most fed officials were divided between three and four.

The Federal Open Market Committee is widely expected to raise short-term interest rates by another 25 basis points following its June 12-13 policy meeting (bringing the target range for the federal funds rate to 1.75-2.00%).

Nonfarm payrolls rose by 223,000 in the initial estimate for May, stronger than expected, but not statistically outside of the moderately strong trend of the last year. We need a little less than 100,000 jobs per month to absorb new entrants into the workforce. Hence, it’s no surprise that the broad range of data has indicated a further tightening in labor market conditions.

The rise in oil prices is expected to have mixed effects on the U.S. economy. Higher gasoline prices will restrain consumer spending growth to some extent. However, increased energy exploration implies more capital spending, adding to GDP growth. For Federal Reserve policymakers, the key question is whether higher costs of transporting goods may be passed along to consumer prices.

The April inflation reports were a bit on the soft side of expectations, reducing somewhat the fears that we’re on the verge of an upside breakout in inflation. There’s no sign that a strong economy is putting much upward pressure on consumer prices.

Nonfarm payrolls rose by a little less than one million in April – that is, prior to seasonal adjustment – up by 2.932 million from January to April (vs. +2.708 million for the same three months a year ago). Seasonally adjusted, the trend in private-sector payroll growth has remained strong in recent months.

Real GDP rose at a 2.3% annual rate in the advance estimate for the first quarter, a bit stronger than anticipated (the median forecast was +2.0%), but “close enough for government work.” These figures will be revised, but the underlying story is unlikely to change much.

The Bureau of Economic Analysis will report the advance estimate of 1Q18 GDP growth on April 27. These figures will be revised, but the underlying story is not expected to change much. Growth was likely moderate, not horrible, but far short of the lofty expectations that some had put forth at the start of the quarter. Nobody appears too worried about that.

The March reports remained consistent with the view that inflation will move toward the Fed’s 2% goal, perhaps sooner than expected. The FOMC minutes were not expected to surprise, but several Fed officials felt that it might be appropriate to move the federal funds rate above a neutral level for a time.

Nonfarm payrolls rose less than expected in March (+103,000), but the trend remained strong, well beyond a pace consistent with the growth in the labor supply.

Recent economic data suggest the overall growth was at a moderate pace in the first quarter, respectable, but short of the very lofty expectations seen at the start of the quarter.

Financial market participants took the Fed policy meeting outcome as “dovish,” but the end result was a little more hawkish. The Fed’s revised economic projections weren’t much of a surprise, but they illustrate the thinking behind the expected monetary policy outlook. Of course, there are risks, notably a major misstep on trade policy. Gulp!

The Federal Open Market Committee is widely expected to raise the federal funds target rate on Wednesday (to 1.50-1.75%). For investors, the key question is the pace of tightening that will follow.

Nonfarm payrolls rose by 313,000 in the initial estimate for February, with a net revision of +54,000 to December and January. The unemployment rate held steady at 4.1%, despite a rise in labor force participation. 

Tariffs on imported steel and aluminum are unlikely to have a major direct impact on U.S. economic growth. However, President Trump’s decision last week has significantly raised the risk level for the U.S. and global economy.

The House Financial Services Committee has shifted Fed Chair Powell’s monetary policy testimony to Tuesday, February 27.

Recent stock market volatility was partly blamed on fear that inflation will soon “take off.” Simple supply and demand arguments would suggest that pressure on resource markets (labor mostly, but also raw materials) would lead inflation higher.

The recent uptick in average hourly earnings (+2.9% y/y) and the surge in the government’s borrowing needs ($1 trillion plus in the current fiscal year) have had some implications for the underlying fundamentals. However, the outlook hasn’t been tumultuous enough to explain multi-100-point intraday swings in the Dow. Something else is clearly going on.

Last week, Treasury announced that it expects to borrow $617 billion in the first half of 2018, vs. $75 billion in the first two quarters of 2017, and announced increases in the sizes of its regular monthly auctions of notes and bonds. It should then be no surprise why bond yields are rising.

A strong economy, a booming stock market, and tighter monetary policy are all dollar positive. So why is the dollar down more than 12% since the start of 2017?

The economic impact of the partial government shutdown will depend on how long it lasts. Government workers will still get paid, but those supporting government workers (food service, etc.) will not. Economic data reports and Treasury auctions may be delayed.

Retail sales figures for December showed a relatively strong trend in 4Q17, although part of that reflects a rebound from hurricane effects in 3Q17. Core CPI inflation was a bit higher than anticipated in December, but that doesn’t mean that the low inflation trend is over.

Nonfarm payrolls rose by 148,000, less than expected, in the initial estimate for December, but the increase was hardly “weak.” There is a fair amount of noise in the monthly figures, but the underlying trend is lower. Despite a tight job market, average hourly earnings were up just 2.5% year-over-year.