Last week, the Fed cut rates 25 basis points for the third time this year. These cuts were widely anticipated by market participants, who are now betting on another cut late next year. The Fed removed the phrase “will act as appropriate,” shifting to a data-dependent view with expectations that the most likely outcome will be moderate growth. In other words, the Fed has completed its “mid-cycle adjustment” or insurance cut, plans to pause rate changes for now, and further action will only be warranted if moderate economic growth expectations fail to materialize. Powell also noted that risks from trade tensions and a “no-deal” Brexit have decreased while slowing global growth remains a concern.
The 10-year minus 2-year Treasury yield spread has positively widened over the past two months, further away from the August yield curve inversion. It’s a positive sign for bullish investors insisting that economic expansion isn’t over. Positive news is further extended from US Q3 corporate earnings season, with 73% of companies reporting an earnings beat. The S&P 500 continued to touch all-time highs, closing above 3,066 on Friday.
US-China trade talks linger but are showing progress. A comprehensive deal is being divided into phases. According to Trump, Phase One is ~60% of the total deal and is expected to be signed this month. It covers some items of intellectual property (copyrights, trademarks, piracy) and limits on foreign ownership in China. It does not address other major issues, such as forced technology transfers, cybersecurity, the social credit system, and the blacklisting of Huawei products, which are expected to appear in Phase Two (or Three if necessary). As always, a re-escalation could occur as it did earlier this year.
UK Prime Minister Boris Johnson was unable to pass a Brexit resolution, forcing the UK to request a three-month extension from the EU to January 31, 2020. As a result and with rare help from the opposition, Johnson moved to secure an unscheduled (“snap”) election for December 12 in an attempt to change the composition of members of Parliament, and therefore change voting results on Brexit legislation. Also in Europe, president Draghi of the European Central Bank (ECB) finished his 8-year term and was replaced by Christine Lagarde, who may shift monetary policy.
The first estimate of Q3 GDP came in at 1.9%, better than the expected 1.7%. August home prices were on the lower end of expectations but pending home sales for September far exceeded upper estimates. Consumer confidence for October was slightly down. Inflation measures remain muted and personal income and spending are hitting their moderately positive expectations.
This week’s releases will include reports on factory orders, JOLTS jobs, and labor productivity and costs.
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