brexit vote

Weekly Market Commentary – October 21, 2019

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Great Britain’s prime minister and the European Union reached an agreement for Britain to exit the European Union on October 31, 2019, pending the approval of the British Parliament. Efforts to secure Parliament’s approval over the weekend were postponed to this week as Brexit opponents seek to shift enough votes to thwart the deal.

Economic news was generally below expectations. In the U.S., retail sales and industrial production both missed expectations. In China, fixed investment and GDP were both below expectations, too. Much of the slowness can be attributed to the ongoing trade war between the two countries.

Key Points for the Week

  • Retail sales and industrial production data showed business investment is slow and trade data is pressuring consumer spending.
  • Brexit negotiations nearly produced a deal as the debate shifted to Parliament over the weekend.
  • Short-term interest rates moved below long-term rates, eliminating the inverted curve for key parts of the Treasury yield.

Global stocks built on recent gains. The S&P 500 climbed 0.6%. The MSCI ACWI index of global stocks gained 0.8%. The Bloomberg BarCap Aggregate Bond Index edged 0.1% higher on the weaker economic news.

The Brexit vote, likely to take place on Tuesday, will be a big focus for investors this week. In addition, U.S. corporations will continue to announce third quarter earnings’ reports, which will provide important data as to how the trade war with China, the stronger dollar, and the slowing economy are affecting U.S. corporations.

yield curve oct 2019

The Beginning or End of the Mystery

Inverted yield curves are a bit of a mystery. The yield curve inverts when short-term rates are above long-term rates. Past inversions have often occurred prior to recessions and are viewed by many as key indicators of future economic health. How yield curves and recessions are related is a big part of the mystery. Either way, interest rates are finally returning to normal. As the accompanying chart shows, the 10-year bond yield is now higher than the three-month yield for the first time since July.

The transition away from an inverted yield curve occurred for two reasons. The Federal Reserve’s recent interest-rate cuts have pushed short-term rates lower, which helped to reduce the difference. Positive news on trade and optimism for better growth in the future pushed long-term rates higher. The two effects combined to remove the inversion.

Unfortunately, the reversal away from the inverted yield curve isn’t the equivalent of the “all clear” announcement. The recession potentially indicated by the yield curve may not come for a year or more. Typically, the yield curve returns to a more normal position well prior to the recession as the slowness works its way gradually through the economic system.

Retail sales and industrial production confirm the economy is not past the risk of recession. Retail sales dropped 0.3% last month, following a string of healthy increases. While employment and wage data continue to produce encouraging results, the strength of the recovery has slowed. Consumers, feeling the slower momentum, have slowed purchases. Industrial production has also declined. A strike at General Motors contributed to the 0.4% decline, but business investment has slowed in the face of increased uncertainty. Continued weakness in retail sales and industrial production will be clues that the economy continues to slow.

While not a normal “whodunit,” the mystery will be whether the slowness in business investment pushes consumer spending lower before the Fed and any trade agreements can create enough growth to overcome the slowness. Rather than indicate the mystery is about to be solved, the yield curve returning to normal indicates, as Sherlock Holmes would say, “The game is afoot.”

Fun Story

Forget Red vs. Blue – Cheap vs. Expensive is the New Divider

The gap in the cost of a date is perhaps even wider than some of the political gaps capturing the imagination of the nation. An average date in New York is more than seven times as expensive as one in South Dakota. It’s true, New York has Broadway musicals and great, expensive restaurants, but that can be less attractive if you are the one paying. However, the cheap-date states know they have some challenges. The tourism motto in Nebraska, which has the third-cheapest dates in the nation, is “Honestly, it’s not for everyone.”

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