Weekly Market Update: Inverted Yield Curve, New Tariffs this Week
Last Week Review
Despite increased concerns on the U.S. yield curve, global equities gained 2.0% last week with help from stable economic data and the absence of further escalation in the U.S.-China trade standoff. U.S. equities returned 2.7%, while non-U.S. developed markets rose 1.0% and emerging markets increased 1.1%. Through eight months of 2019, global equities are up 14.3%.
Inverted Yield Curve and Recession Potential
The 10-year Treasury yield dropped below the two-year yield last Tuesday, though it steepened slightly by the end of the week so that both maturities ended at 1.50%. Each instance of this inversion historically has been followed by a recession, with recessions typically occurring one to two years after the initial inversion. However, equities have often held up well in the months after the inversion until the recession hits. The yield curve remains a key item on the list of risks being gauged by investors in addition to trade tensions. On the contrary, others are comforted by overall solid U.S. economic growth figures, a strong labor market and a constructive outlook across the consumer side of the U.S. economy.
Inflation Falls in Europe
Inflation readings in Europe declined last week, likely pressured by lower oil prices’ effect on headline inflation. Germany’s headline inflation rose 1.4% year-over-year, short of consensus expectations, while inflation throughout Europe was 1.0%. In the U.S., core personal consumption expenditures was unchanged at 1.6%, still considerably short of the Federal Reserve’s 2% inflation target. In additional economic data last week, U.S. consumer sentiment declined significantly from the prior level because of consumer concerns over increases in U.S. tariffs.
No-Deal Brexit Odds Increased
U.K. Prime Minister Boris Johnson suspended Parliament last week for more than a month, an unusual move. Johnson’s actions diminish Parliament’s ability to prevent a no-deal Brexit in late October, though other developments could arise to prevent a no-deal outcome before then. Elsewhere in Europe, government bond yields in Italy rallied on news that the Five Star Movement and Democratic parties reached agreement on forming a governing coalition. Though not fully finalized, a new coalition would remove the need for a snap election and reduce uncertainty around Italy’s upcoming budget.
This Week Preview
U.S. and China New Tariffs This Week
The U.S. and China will escalate their trade war this week with an exchange of more tariffs. The U.S. will place a 15% tariff on about $125 billion of imports from China, while China will place 5% to 10% tariffs on as much as $75 billion in U.S. imports. Further trade talks have been tentatively planned for early September, but there has been little indication recently that either side is eager to make significant concessions in order to reach a deal.
U.S. Jobs Report Friday
U.S. employment figures will be released this Friday and are expected to continue to reflect a strong U.S. labor market. Consensus expectations call for 158,000 jobs added, shy of the monthly average this year. Wage growth year-over-year is expected to modestly decline to 3.0% from 3.2% the previous month. The unemployment rate is expected to remain unchanged at 3.7%.
Minor Improvement Expected in Growth Data
The Purchasing Managers’ Index (PMI) will be released in the U.S. and China this week. It is expected to remain in expansionary territory in the U.S. while China is expected to remain slightly in contractionary territory. Germany manufacturing data will also be released this week, including factory orders and industrial production.
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