The drumbeat of impeachment dominated the headlines last week as markets began to digest potential ripple effects of heightened U.S. political theater alongside trade, Brexit, and Iran.  The market perspective is whether a preoccupied Congress may translate to delays in NAFTA/USMCA approval, spending bills, and Japan/EU trade deals. The flipside being political pressure to push harder to get deals done.  Stock markets fell for a second consecutive week but sit only 2.2% off record July levels. The general unease took bond yields down across the curve and increased appetite for the USD.

Market Anecdotes

  • Impeachment is back in the conversation at an ‘inquiry’ stage with news of POTUS dealings with Ukraine.  A look back at Nixon and Clinton impeachments reinforce the notion that economic, fundamental, and geopolitical developments far outweigh domestic political implications as it pertains to the financial markets.
  • We saw marginally positive trade developments last week as China granted tariff waivers on a basket of agricultural products and progress was announced on the first stage of a trade deal with Japan.  Limitations on U.S. investment in China dampened the atmosphere Friday.
  • Saudi Arabia moved to enact a partial cease-fire in Yemen following a similar move from opposition Houthi.  Oil markets responded by falling 2%-4% on the week.
  • Bianco research pointed out that, for the first time in the post-WW2 era, the U.S. has the highest developed world interest rates across the yield curve (FF, 3m, 10yr, 30yr).  Only the 30yr UST is over 2% and half of the developed world rates are in negative territory.
  • The U.K. had a Marbury vs Madison moment with the court’s finding they do indeed have jurisdiction (judicial review) over the PM Johnson’s maneuver advising the Queen to prorogue Parliament – and they ruled it unconstitutional.  A no-deal Brexit seems off the table for now but risk that the EU does not grant an extension is still a key factor.

Economic Release Highlights

  • August headline and core PCE inflation of 1.4% and 1.8% came with a light monthly reading (0.1%) but the YoY rate crept slightly closer to the 2% Fed target.
  • August PCE consumer spending of only 0.1% was softer than expected and may translate to lower 3Q GDP estimates.  Personal income moved 0.4% higher, a solid gain.
  • U.S. flash September PMI readings were little changed from August at 51.0, 51.0, 50.9 (C, M, S), continuing a weak stretch with the services reading now at record lows for this data series.
  • Eurozone flash September PMI readings also swung to new lows at 50.4, 45.6, 52.0 (C, M, S) with Germany plunging to its lowest level since 2009 while France has held steady all year.
  • August durable goods growth of 0.2% were on the higher end of expectations orders ex/transportation handily beat consensus (0.5% v 0.2%).  However, fizzling core capital goods orders (-0.2%) alongside downward revisions to July are signaling poor 3Q business investment.
  • Final estimate for 2Q GDP remained at 2% with reminders of unusually strong consumer and government spending (4.6% PCE, 4.6% govt) the primary drivers, underscoring Fed confidence in the economy.
  • September UofM consumer sentiment improved to 93.2, a 3.4 increase from August, yet still among the lowest readings of the past three years.
  • Conference Board consumer confidence slipped in September (125.1 v 133), down sharply from July and August levels.  The report was greeted with a note of caution for the consumer but the overall trend remains positive on the year.
  • Case-Shiller HPI for July didn’t move from June’s levels (0% MoM) and sits 2% higher YoY.
  • August new home sales of 713k and pending home sales of 1.6% both easily topped expectations, confirming a pivot higher in the housing market.