NEW YORK, New York - The government shutdown has now entered its fifth week, with key data releases such as retail sales and housing starts suspended last week, increasing concerns about the shutdown's impact on economic growth, wrote Dr David Kelly, Chief Global Strategist for JPMorgan, in the bank's weekly economic update published on Monday.  

The Job Openings and Labor Turnover Survey (JOLTS) showed fewer job openings in November vs. the prior month, but still more openings than those unemployed for the 9th consecutive month. Nonfarm payrolls increased by 312,000 jobs in December, well above expectations of under 200,000. Notably, the unemployment rate rose to 3.9%, pushed up by entrants in to the workforce, moving the labor force participation rate up to 63.1% from 62.9%. Wages enjoyed a healthier-than-expected gain of 0.4% m/m (3.2% y/y). Gains in both payrolls and wages should bolster consumer spending and thus overall economic growth in 2019.

With 47 companies having reported (13.5% of market cap), JPMorgan's current estimate for fourth quarter earnings is $39.61 ($32.62 ex-financials), and 74% of companies have beaten on earnings while 36% have beaten on revenue. 2018 earnings are on track for 26.0% y/y growth, but after an acceleration in recent quarters, peak growth rate is likely behind us. This quarter, JPMorgan expects tax reform to contribute approximately 7-8 percentage points to overall growth. "We are expecting strong results in the energy, healthcare, financials and materials sectors, while real estate, utilities and consumer staples are all expected to contract. Technology and communications services should be relatively neutral," wrote Kelly.

Headline CPI fell 0.1% in December after the decline in oil prices brought the energy component down 3.5% m/m. Core CPI remained stable, rising 0.2% m/m and 2.2% y/y, in line with November's reading. Headline PCE, the Fed's preferred inflation measure, fell to 1.8% y/y in November and core PCE fell to 1.9%, the first time since February that both numbers are below 2%. Overall, inflation continues to be stable and should remain near or slightly below 2% in 2019.

The Federal Reserve raised its target range for the federal funds rate to 2.25%-2.50% at its December meeting. The FOMC also released its economic projections, lowering expectations for real GDP growth in 2018 and 2019, and lowering its headline PCE projection to 1.9% for both 2018 and 2019. Although the statement and projections were more dovish, Fed Chair Jay Powell's comments in the press conference were slightly more hawkish. The Fed is likely to raise rates once or twice in 2019.

Risks:

The government shutdown may diminish 1Q19 U.S. GDP growth.

Trade tensions may exacerbate a slowdown in global growth.

The Federal Reserve may tighten monetary policy too aggressively.

Investment Themes:

Risk assets have reasonable valuations and may have room to run heading toward the end of this cycle.

Credit and short duration tend to perform well late cycle, while core fixed income protects heading into a downturn.

Long-term growth prospects and cheap absolute and relative valuations support international equities.