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Week In Review

The Fed

This week, the Federal Reserve Open Market Committee (FOMC) announced its decision to increase the federal funds rate by 25 basis points to a range of 2.25% to 2.50%.  According to the Fed statement, the labor market continued to strengthen and economic activity has been “rising at a strong rate.”  The committee noted that both household spending and business investment have “grown strongly” and unemployment stayed low.  The committee also stated that overall inflation remains near its 2% target and that indicators of longer-term inflation expectations are little changed.  Of note, the Fed’s Summary of Economic Projections showed that the majority of members expect only two rate hikes in 2019, down from three in the September forecast.

Our Take

Unemployment is low, growth remains solid, and inflation is near its 2% target.  Despite the positive outlook on the economy, it is clear Fed members see some signals that growth may begin to moderate in 2019.  This has led to modest reduction in the Fed’s rate hike forecasts.  Although rates are likely to go higher next year, it appears the Fed’s gradual pace may slow down.


President Xi gave a speech to key leaders in which he reaffirmed China’s commitment to developing capabilities in key areas and state support for achieving this goal.  Later in the week, economic policymakers announced fresh rounds of monetary and fiscal stimulus to offset the recent deceleration in China’s economy.

Our Take

Xi’s speech indicates that the U.S. and China remain far apart on the fundamental issues underlying the trade dispute that is currently underway.  The stimulus measures signal that maintaining and reviving economic growth are taking priority over efforts to de-leverage and reduce financial risk in the Chinese economy.


The Italian government and the EU reached agreement on the 2019 Italian budget after some changes that brought the proposed deficit down to 2.04%.  Spreads on Italian government bonds tightened in response to the news that Italy would avoid the Excessive Deficit Procedure for its 2019 budget.

Our Take

Most of the changes were alterations to assumptions about growth and the impact of proposed measures.  It remains to be seen if the actual Italian deficit narrows to an acceptable level that will allow Italy to reduce its heavy debt load.  For now, it looks like the EU has found a way to delay any enforcement effort on Italy’s fiscal policy, but the issue of Italy’s excessive indebtedness is far from resolved.


Oil prices plummeted to multi-year lows on concerns that the announced OPEC+ production cuts will be insufficient to offset U.S. shale supply growth and waning demand growth driven by a slowing global economy.

Our Take

2019 demand and the impact of lower prices on U.S. shale supply growth are the big unknowns for the trajectory of oil prices in the near term.  Prices holding at this level will likely present problems for some producers in the U.S. and for Saudi Arabia, who needs higher prices to fund government spending.

U.S. Economy

Numerous economic statistics were reported this week.  Third quarter GDP was revised lower, from 3.6% to 3.5%, while personal consumption rose 3.5%.  November personal income rose 0.2%, while spending increased 0.4%.  October spending was revised to 0.8% from 0.6%.  November durable goods orders rose 0.8%, just half of the expected 1.6% increase.

Our Take

A strong economy (as evidenced by GDP, consumption, and spending reports) was the main reason for the December Fed rate hike.  However, those against the rate increase worry that the Fed is increasing interest rates just as the economy is beginning to slow.  The November durable orders report indicates this may be true.  Either way, look for markets to be volatile in 2019, as participants are likely to react more strongly to economic releases now that future Fed policy moves are less predictable.


The Philadelphia School District has an investment grade rating for the first time since 1977.  The school district had carried a Ba2 junk rating before Moody’s issued a two-notch upgrade to Baa3 with a stable outlook this week.  The upgrade affects $3.2 billion of debt according to Bloomberg.  Moody’s cited the new school board appointed by the mayor and an improved economy as some of the reasons for the upgrade.

Our Take

Philadelphia’s lawmakers have promised $547 million in new funding for the district.  The city’s improving economy and property tax increase have allowed for more money to be allocated to the school district, cutting the deficit.  This week’s upgrade is a positive for the Philadelphia School District, as the district’s borrowing costs may go down as a result of the investment grade rating.

All expressions of opinions are subject to change without notice in reaction to shifting market conditions.  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.  Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.