Summary and Conclusion:
Asset prices rose in March as market participants became more confident that the Federal Reserve would remain on hold during 2019 regarding the level of the Federal Funds rate and trade negotiations with China would end on a positive note. Market participants were encouraged by the message from the March Federal Open Market Committee (FOMC) meeting that signaled a tapering of the balance sheet normalization program and an end of the program in September. In addition, the FOMC repeated its intention to maintain its pause in increases in the Federal Funds rate and further changes in the Fed Funds rate would be data dependent. Market participants are now more positive than they were last month that they will see no rate increases during 2019. Market prices imply no increases in the Fed Funds rate during 2019 and any change in rates would be a cut. However, the Fed has maintained its balance sheet reduction at $50 billion during April, but Chairman Powell stated during the Press Conference that they would begin tapering the balance sheet reduction and end the program in September. We should learn more about the balance sheet normalization program when the minutes of the March meeting will be released on April 10 and when the Press Release is issued after the May 1 FOMC Meeting and we hear Chairman Powell’s statements during the Press Conference. Although asset price volatility has been low during March, asset prices have responded to news on China trade negotiations (positive) and on U.S. and global data releases on economic activity (negative). Data on economic activity has been negative on balance in both the United States and the Rest of the World -- a decline in global international trade in December and January (often an indicator of an economic slowdown/recession) and weaker economic activity in China, Europe, and the United States. The IMF indicated that they will lower their outlook for the global economy when they release their global economic outlook next week. (Data releases for the United States will be distorted for the next few months because of the way the Bureau of Economic Analysis accounts for the effect of the government shutdown on published economic output and prices – lower output and higher inflation in 2019Q1 and higher output and lower inflation in 2019Q2.) The yield curve flattened and briefly inverted (U.S. Treasury 10 year – 90 day) – another signal for past recessions..