Deteriorating sentiment related to global growth and a 2yr/10yr yield curve inversion weighed heavily on equity markets and bond yields but things trended more optimistically as the week wore on. Markets shrugged off an announcement (Tues) delaying recently announced 10% tariffs as well as some encouraging U.S. economic releases and remained focused on non-U.S. growth, trade war volleys, plummeting interest rates (curve inversion), and global political concerns. After all was said and done, equity indices finished down 1%-1.5% but U.S. treasury yields continued their steady march lower.

Market Anecdotes

  • U.S. treasury yields marked new all-time lows last week and moved to an inversion in the 2yr/10yr portion of the curve. The 30yr UST traded below 2% and 10yr yields are now well below election day 2016 levels, triggering debate on signaling implications of both yields and slope.
  • Goldman report suggested a 13% chance of getting a trade deal done, down from 80% last April with Huawei being the largest sticking point.
  • U.S. growth seems to be holding up.  3Q Atlanta Fed GDPNow forecasts 2.2% on strong PCE, government spending, and nonresidential fixed investment. 2019 EZ fiscal thrust is estimated at 0.4% of GDP, its largest stimulus since 2010.
  • Wal Mart’s earnings release marks the unofficial end of Q2 earnings season. Over 2,000 reports have registered a 57.2% beat rate, which is the lowest mark since Q1 2014.
  • A NY Fed report on consumer credit growth showed mortgage debt at 4.5% and non-mortgage at 3.7%, both viewed as moderate and sustainable.
  • ICI fund flows remain heavily skewed out of equity and high yield categories, favoring bond funds.  In weekly flow terms, high yield outflows were stronger than 97% of weeks since 2007 and high-quality bond inflows were in the 99th percentile of all periods.
  • Hong Kong protests, Brexit, Italy’s governing coalition, and Argentinian elections headline the list of global political concerns we are actively monitoring.
  • Global manufacturing cycles tend to run 3yrs. The most recent global downturn began in early 2018.Bearish (44.85%) and bullish (23.18%) AAII readings are both in excess of one standard deviation above/below their respective historical averages.
  • BoAML fund manager survey shows 34% believe recession likely in next 12 months and a 5.2% cash allocation is 1.5 standard deviations above its long-term average while asset allocators are net 12% underweight stocks (1.7 standard deviations below).
  • The most recent ZEW analyst survey has U.K. growth expectations at a record low and U.S. at its lowest reading since October 2008.

Economic Release Highlights

  • July headline and core CPI registered some pressure at 1.8% and 2.2% respectively. Healthy medical (3.3%) and housing (3.0%) cost increases were the primary drivers.
  • Headline July retail sales were strong at 0.7%, beating consensus estimates across all three sub-categories as well. While autos remained soft, strength was evident across e-commerce, brick & mortar stores, and restaurants.
  • July industrial production came in weaker than expected (-0.2% v 0.1%) with manufacturing missing as well (-0.4% v 0.1%).
  • Philly Fed and Empire State manufacturing sentiment readings both beat expectations on healthy new orders, inventory accumulation, and shipment activity.
  • The German economy contracted in 2Q19 as domestic auto production fell to levels not seen since 2009.
  • NAHB housing market index edged 1pt higher to 66, matching the year’s high mark set back in May, signaling a steadily improving backdrop for the housing sector.
  • July housing starts and permits were mixed with lower than consensus starts but higher than consensus permits.
  • Preliminary August consumer sentiment registered a sharp decline to 92.1, missing consensus calls for 97.5.  Tariff concerns were most frequently cited as were cautious Fed narratives.
  • The federal government monthly budget statement last week showed a persistently widening deficit, driven by weak tax receipts, tax reform, and increased spending.  The past three months have seen the widest deficits since 2012, despite a stronger economy.