Stocks, bonds, commodities, and the U.S. dollar all moved higher last week on the back of a few amicable trade nuggets and the relative condition in the global capital markets. The last three days of August produced a +3% rally in the stock market and it will be interesting to see whether that’s a foundation building block or a pedestrian intermittent move given the backdrop. Treasury yields resumed their historic move lower and the yield curve became further (and newly) inverted.

Market Anecdotes

  • The run on treasuries continued last week in a robust rally that pushed the curve into (and deeper) inversion.  The 30yr UST fell below the S&P 500 dividend yield for the first time since March 2009.
  • The 3m/10yr inversion entered its fourth month and notched new lows (-0.50%), sitting solidly in compelling territory as it speaks to Fed policy. The 2yr/10yr became inverted briefly last week for the first time in over 10 years sparking questions around the future economic outlook.
  • The CME Fed Funds futures are pricing in a 99.8% probability of a 25bps cut at the September 18th FOMC meeting.
  • A lack of political urgency in China combined with a need for “strong” optics given the backdrop of Hong Kong has Strategas projecting this trade war not going away anytime soon.
  • POTUS announced the general parameters of a trade deal, to be finalized in September, with Japan.
  • Bespoke noted how breadth has repeatedly led indices out of correction/pullbacks over the past twelve months. Last week, the cumulative A/D line (S&P 500) notched a new high on the back of the August volatility.
  • PM Boris Johnson asked for and was granted a parliamentary shutdown as an end-around to forcing the Brexit issue forward.  Questions swirled around constitutionality, democracy, and votes of no-confidence on the PM.
  • German fiscal policy is almost as exasperating as POTUS twitter missives. Despite downward trending economic indicators and negative yields out to 30 years, German fiscal policy has been a substantial headwind to growth since roughly 2010.

Economic Release Highlights

  • July PCE consumer spending jumped 0.6% MoM with strength across both durable and non-durable categories.
  • July YoY headline and core PCE inflation of 1.4% and 1.6% respectively came in very tame while income growth of 0.1% remained very subdued.
  • July durable goods orders jumped 2.1% (1.2% consensus) on strong aircraft and auto orders along with healthy core capital goods number (0.4% v 0%). Ex-transportation reading was disappointing (-0.4% v 0%) with weakness in metals and machinery.
  • 2Q GDP was revised -0.1% to 2%. Consumer and government spending were stronger but offsets in next exports and residential & non-residential (business spending) fixed investment resulted in the downward revision.
  • Pending home sales sank 2.5% in July after a strong June but a 105.6 index remains one of the strongest in the past year.
  • Case-Shiller HPI for June was weak, missing estimates (0% v 0.2%) and up only 2.2%YoY, the slowest annual pace in seven years.
  • August consumer confidence reading weathered stock market volatility and trade wars very well, beating consensus (135.1 v 130).  An example of consumer resilience, the current conditions component jumped 6 points to 177.2, a 19-year high.
  • UofM consumer sentiment registered a disappointing 89.8, well below expectations (92.3) and the lowest reading since October 2016.
  • Eurozone unemployment rate for July of 7.5% came in at consensus, equaling its lowest reading since July 2008.
  • Markit Manufacturing PMI headline index for China advanced from 49.9 in July to 50.4 in August