Which is it – growth or gloom? With 10-year U.S. bond yields below 3-month T-bill rates for the first time in more than a decade, recession fears are swirling. After all, an inverted yield curve, when longer-dated yields drop below shorter maturities, have proved to be fairly reliable predictors of U.S. recessions in the past. As a result some investors are busy putting cash behind bets the Fed is gearing up for rate cuts.
But there are many who scoff – they point to a world economy chugging along at a decent clip, dovish central banks and company earnings that are still growing, albeit more slowly. So while Treasury yields are down 30 basis points this quarter, world stocks are up more than 10 percent. Recession skeptics may also note that U.S. equities are not far off record highs and credit spreads have retraced most of their December losses.
Also, while past recession discussions have focused on inversions of the 2-year/10-year U.S. curve, that hasn’t reacted so far. Fed policymakers too, such as voting member John Williams, say they are not worried about recession this year or the next. Others such as James Bullard seem to be endorsing the “this time is different” argument, hinting that the curve’s predictive power has weakened.
But policymakers around the world have already taken heed. The ECB has hinted at further rate cut delays and at tiering interest rates to help banks; other central banks, from New Zealand to Canada, are hinting at rate cuts ahead.
THE END OF THE ROAD?
No. No. No. No. Parliament’s cold response to Prime Minister Theresa May’s Brexit deal so far means the manner of Britain’s exit from the European Union – originally scheduled for March 29 – is unknown.
Brussels has let Britain delay its departure while May battled to find a way forward but there is little enthusiasm in parliament or the population even for the stripped-down version of May’s twice-defeated deal. But lawmakers have also given the thumbs-down to a series of other amendments, including revoking Brexit, delaying it further or holding another referendum.
Dismayed investors have been avoiding the pound but the resulting shortage in trading volumes just exacerbates price swings. The question now is whether the most hardline Conservative euroskeptics and Northern Ireland’s DUP, the party propping up May’s government, can ever be convinced to back an exit deal before the new April 12 deadline.
If the withdrawal agreement does somehow scrape through, sterling would likely surge above $1.35. For the time being though, the bleak, if unlikely, alternative scenario – a chaotic no-deal departure – persists.
Options markets aren’t optimistic. The price investors are willing to pay for one-month sterling protection – insurance against sterling falls – is at the highest since the 2016 referendum vote.
WORKIN’ FOR A LIVIN’
U.S. factory job growth was its weakest in February since the summer of 2017 but still managed to extend the streak of monthly gains to 19, the longest in nearly a quarter century. If, as expected, Friday’s March payrolls report makes it 20 in a row – economists polled by Reuters predict a 10,000 increase – it would mark the longest uninterrupted run of manufacturing employment expansion in a generation, matching the run from January 1983 through August 1984.
But while comparable in length, the current manufacturing renaissance pales in terms of total jobs created. Back then, U.S. factories added 1.34 million workers, more than three times the 417,000 new jobs since the current streak began in August 2017.
For early clues on the jobs data, cast an eye on Monday’s ISM Manufacturing Index. Its employment component is closely correlated with the Labor Department’s manufacturing payrolls series. ISM’s February reading on factory employment, at 52.3, was the weakest in more than two years. Should it drop below 50, the level separating expansion from contraction in the ISM series, it could signal an end to manufacturing employment’s long run. The last time ISM had a sub-50 print was September 2016. That month, U.S. factories cut 3,000 jobs.
DEAL WITH IT
A month has passed since the United States and China missed an initial deadline to agree a trade deal. The first face-to-face meetings between the two sides since that deadline were apparently “constructive” and “productive”; now Chinese Vice Premier Liu He is to travel to Washington for further talks.
In the meantime though, tariffs on Chinese goods worth $250 billion are in play and that is hurting – China as well as its Asian neighbors who are linked to it through complex supply chains. March Purchasing Managers Indexes are expected to show a further deterioration in sentiment across the region and another source of pressure is the worry of a recession in the United States.
The one thing preventing panic is the hope Beijing will provide enough stimulus to offset slowing trade. Central bankers around Asia have started hinting at interest rate cuts, relieved at the end of the Fed’s policy-tightening campaign. But the upcoming activity data might show how soon they need to act.