FIG Topics of Interest



The proportion of the yield curve that’s inverted isn’t as high as in past recessions, and part of the reason 10-year Treasury yields have slumped can be attributed to dynamics outside the U.S., Goldman strategists led by Alessio Rizzi and Christian Mueller-Glissmann wrote in a note Monday. American credit spreads also aren’t telegraphing stress, they highlighted.
“Recession risk remains somewhat low even amid an environment of lower returns” and a high rate of change for volatility itself, the Goldman strategists wrote. While the economic backdrop indeed may be less favorable, hurting profit growth, “equity and risky assets in general can have positive performance with a flat yield curve,” they wrote.

Others agree that things aren’t so dire. Fidelity International is among those anticipating a pick-up in growth later this year. Andrea Iannelli, a London-based investment director at the fund manager, wrote Tuesday that “given how much pessimism is already baked into prices, we favor an underweight stance to U.S. rates.”

At Morgan Stanley, strategist Matthew Hornbach thinks the three-month-10-year inversion would need to continue at least until the June Federal Reserve policy meeting before policy makers get “uncomfortable. If it continues beyond that, the Fed may begin to contemplate actions necessary to keep the party going."

For his part, Chicago Fed President Charles Evans said Monday that yield curves recently have been “throwing off a slightly higher probability of recession” but they have “often misfired” in the past. And Boston Fed President Eric Rosengren said Tuesday he doesn’t “take nearly as much information from the shape of the yield curve as some people do,” though it should pick up if the economy grows as he expects.

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“We have to take into account that there’s been a secular decline in long-term interest rates,” Evans said in comments at the Credit Suisse Asian Investment Conference in Hong Kong, days after the Fed signaled an end to its tightening and abandoned plans for further rate hikes in 2019.

“Some of this is structural, having to do with lower trend growth, lower real interest rates,” he said. “I think, in that environment, it’s probably more natural that yield curves are somewhat flatter than they have been historically.”

On the sidelines of the conference, Evans told CNBC in an interview that he could understand why investors were more “watchful, waiting and looking,” adding the Fed was doing the same. But, he added, economic fundamentals were “good” and he expected growth to be around 2 percent this year.

“Your first reaction is gonna (be) ‘wow, this is less than what we had’ and I think this is missing the message.”
Speaking at the same event, former Fed chair Janet Yellen said the yield curve may signal the need to cut interest rates at some point, but it does not signal a recession.

“In contrast with times past, there’s a tendency now for the yield curve to be very flat,” Yellen, who led the Fed between 2014 and 2018, said.

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Hopes that the slowdown had reached a trough have taken a beating from renewed weakness in France and the deepest slump in German manufacturing in over six years. A euro-area Purchasing Managers Index is signaling growth of 0.2 percent this quarter, matching the pace of the previous three months.
Much of the source of the economic weakness appears to be external, with export orders -- particularly in manufacturing -- under pressure. Trade tensions, tariffs and weaker global growth are all taking a toll, with Germany feeling much of the pain. Japan, another export heavy economy, also reported a contraction in activity in its manufacturing sector on Friday.

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“Slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue,” Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, said in statement.
A top executive at FedEx is flagging serious concerns in the global economy.
The multinational package delivery service reported declining international revenue because of unfavorable exchange rates and the negative effects of trade battles.

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U.S. economic growth is set to slow sharply this year and next, according to respondents to the CNBC Fed Survey for March, and weaker global growth and tariffs are seen as the major culprits.

The average forecast for gross domestic product growth this year is just 2.3 percent, down from 2.44 percent expected in the January survey and a further slowing from the actual 3.1 percent year-over-year pace for the fourth quarter of 2018. Economic growth is seen stepping down below 2 percent in 2020, according to the survey.
Asked about the biggest threats to the US expansion, slowing global growth and protectionist trade policies ranked No. 1 and No. 2, respectively.

“If Trump wants to be a two-term president, he needs to make a China trade deal and start lowering tariffs across the board,” said Hank Smith, co-chief investment officer, Haverford Trust Company. “This will cause business confidence to rise and capital spending to increase, stimulating the economy.”

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“The basic cyclical trend of the German economy remained subdued after the turn of the year. This was mainly due to the continuing slowdown in industrial momentum,” the Bundesbank said in its monthly report published Monday. Greater catch-up effects in the country’s auto industry “are no longer expected for the current quarter.”
The assessment comes after a series of temporary factors -- such as new emissions-testing procedures that stalled production at carmakers -- led to an unexpectedly pronounced weakening of key economic metrics. Policy makers are trying to assess how much of the slowdown in Germany and the euro area is related to one-offs, or whether it marks a more protracted shift in the economy.

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“We need to make sure inflation doesn’t keep slipping down toward zero, because then the central bank really does have less and less ability to react to downturns,’’ Fed Chairman Jerome Powell said during a Q&A at Stanford University on March 8.
Fed officials have long called their 2 percent inflation target “symmetric,” but now they want you to know they really mean it. They’re so concerned that policy makers are contemplating creative, and politically risky, strategies for raising long-run inflation rates.
Put simply, many economists believe inflation outcomes are heavily influenced by what ordinary people expect inflation will be. Testifying before Congress on Feb. 26, Powell called inflation expectations “the most important driver of actual inflation.”

In theory, this works through two channels: consumption and price setting. If millions of people expect inflation this year will rise substantially, eating away at the purchasing power of their incomes, consumers and businesses will bring forward spending and investment decisions. At the same time, workers will ask for higher wages and firms will raise prices. The higher demand, plus higher wages and prices, will help generate the inflation that’s anticipated.
The concept explains why central bankers have made supreme efforts since the 1970s and ‘80s to establish their credibility in controlling inflation. Once the public trusts in that commitment, expectations for inflation won’t respond significantly to shocks, like a big jump in energy prices or a sharp drop in unemployment, thereby helping to anchor actual inflation at a low level.

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“Put the Federal Reserve pause, trade truce, and China stimulus together and we’re looking for a trough in the first quarter and very moderate pick up ahead,” said Tom Orlik, chief economist at Bloomberg Economics.
IHS Markit’s indicator of global growth rose in February from a 28-month low and, encouragingly, there was an improvement in the gauge of demand. Its measure of worldwide services also picked up in February for the first time in three months. Citigroup’s surprise index for the euro area -- which has been one of the weak spots of the global economy -- has rebounded to its best reading in almost five months.

In China, a measure of new orders in the manufacturing Purchasing Managers Index improved last month, and Germany got good news about an increase in water levels on the River Rhine. A drop last year disrupted barge traffic, hitting industry and adding to the temporary factors that pushed the economy near a recession.
“Global trade fears are overblown, as are concerns that global growth may slow significantly,” according to Robin Brooks, the IIF’s chief economist.
The International Monetary Fund is still predicting global growth of 3.7 percent this year and 3.5 percent in 2019, a pretty good clip for this stage of the expansion. Deutsche Bank strategist Alan Ruskin also argues there is reason to be more upbeat than the headlines suggest. China’s economy, for example, is five times its size in 2000, meaning a 6 percent growth rate now is equivalent to 30 percent back then.

“When making even longer-term comparisons, absolute levels and changes become even more important than the limited perspective provided by percentage changes,” he wrote in a note to clients this week.

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“This is no way to run a country,” Carolyn Fairbairn, director general of the Confederation of British Industry, told the BBC. “What we are potentially going to see is this imposition of new terms of trade at the same time as business is blocked out of its closest trading partner. This is a sledgehammer for our economy.”
The U.K. will avoid imposing tariffs on most imported goods in the event of a no-deal Brexit, though officials said prices of key European Union products including beef, cheese and cars will rise.

The government said Wednesday its “balanced approach” aims to offset a spike in prices that consumers would experience in a no-deal departure as a result of the falling pound and higher costs of imports. But a major U.K. business lobby described it as a “sledgehammer” for the economy.
The announcement comes after Parliament overwhelmingly rejected Prime Minister Theresa May’s Brexit deal for a second time Tuesday night, and lawmakers are expected to vote Wednesday to rule out leaving the EU without a deal -- a scenario the premier herself accepted would cause “damage” to the U.K. Revealing the government’s no-deal planning so close to the vote will be seen by many MPs as a strategy to focus minds.

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President Donald Trump’s "I LOVE YOU!" tweet to farmers is facing another challenge: Budget cuts that will slash subsidies for crop insurance and small growers.
Trump’s 2020 budget, released Monday, calls for a 15 percent funding drop for the Department of Agriculture, citing “overly generous” subsidies. The president is seeking one of the largest-ever cuts to domestic discretionary spending in a $4.7 trillion fiscal 2020 budget proposal that also boosts defense spending and adds $8.6 billion for building a border wall.
Trump’s budget “proposes that USDA responsibly and efficiently use taxpayer resources by making targeted reforms to duplicative programs and overly generous subsidy programs,” according to the document.
The plan would trim the USDA budget by $3.6 billion to $20.8 billion, lowering subsidies for crop insurance premiums to 48 percent from 62 percent, and limiting subsidies for growers who make less than $500,000 annually.

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