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A Macro View - Can Fed stimulus compensate for trade war damage?
Chart of the Week
- The bond market yield curve inverted three times last week, with the yield on the 10-year U.S. Treasury Note trading under that of the 2-year note. The short-lived but significant moves in the bond market occurred on Wednesday, after the Fed released minutes of its last meeting, reiterating that its rate cut was a mid-cycle adjustment, and on Thursday, after a drop in the Markit Flash Manufacturing PMI data. The curve inverted again on Friday as both the US and China hardened their positions on trade disputes. Some economists believe that the distortion in the bond market is a result of the current weakness in markets outside the US, especially the negative yields in Europe. Other economists suggest that it may be signaling recession, as has occurred after past yield curve inversions.
- At the Jackson Hole annual Economic Policy Symposium that kicked off on Friday, Fed Chair Jerome Powell hinted at possible interest rates cuts if a slowdown hits the economy, disappointing some investors (including current administration officials), who were expecting a more aggressive easing campaign. With global recession fears growing and bond yields tumbling, this week’s gathering was one of the most anticipated in years.
- US new home sales missed estimates in July, falling 12.80% to a seasonally adjusted annual rate of 635,000 units. The drop is pointing to more housing weakness despite lower mortgage rates and a stronger labor market. Economists had expected a sales pace of 649,000 units.
- The federal deficit is expected to inflate to higher levels than previously thought over the next decade, according to the non-partisan Congressional Budget Office (CBO). The US budget deficit is expected to balloon to $960 billion in 2019 and average $1.2 trillion per year between 2020 and 2029. The office also projects that the current administration’s tariffs will shrink US gross domestic product (GDP) by 0.30%, whereas further tariffs hikes could hamper economic growth. Currently, the CBO is projecting a real GDP growth rate of 2.30% in 2019.
- On Wednesday, Germany sold close to $1 billion of 30-year bonds at a negative yield for the first time in its history. The bonds, which sold for an average yield of -0.11%, have a zero-coupon feature (and therefore pay no interest) and will mature in August 2050. Currently, about 15 trillion of negative-yielding bonds are outstanding worldwide, a good chunk of which was issued by European governments or state-sponsored agencies.
- US equities seesawed most of the week on worries about a potential recession in the US as well as an escalation of the trade war with China. The S&P 500 Index lost more than 2.5% on Friday after President Trump ordered US companies to “find an alternative to China,” which followed China’s announcement that it would impose new tariffs on $75 billion of US goods. International equities followed a similar pattern, with both developed and emerging markets erasing earlier gains.
- Treasury yields increased across the board, with the yield on the 2-year note increasing more than that of the 10-year note. During the week, the yield curve inverted three times.
- Commodity prices fell, with crude oil weakness weighing on the asset class after China announced a 5% retaliatory levy on US crude. Gold and other precious metals gained ground as tensions rose between the US and China.
- Claims for unemployment benefits fell last week to 209,000, a historically low level that signals the labor market is on firm footing, according to a Labor Department report.
- The Markit Flash Manufacturing PMI dropped to 49.9 this month, falling below 50 for the first time in about ten years. The index also was lower than the 50.3 reading forecast by economists in a WSJ survey.
- The Conference Board Leading Economic Index (LEI) ticked up 0.50% from the previous month to 112.2 in July, which signals that the economy will continue to expand in the second half, albeit at a slower pace.
- The University of Michigan’s preliminary August survey showed that consumer sentiment fell to 92.1 in August from the 98.4 level reached in July. The reading, which was well below the market consensus of 97.2, was the lowest since January, and reflects growing concerns of an economic downturn and stock market volatility.
- Sales of new US homes fell in July, missing estimates, after an upward revision to the prior month brought those sales to the highest level since 2007, a sign that lower borrowing costs may be helping to stabilize purchases.
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