Weekly: Recession worries and declining rates
- Decline in government bond rates and rebound in gold price highlight the deepening risk aversion
- One looming risk is if weak manufacturing activity would spill over into services
- Another risk is if the US economy is about to follow the rest of the world in slowing sharply
Brexit, impeachment, trade war, Hong Kong, Iran, manufacturing recession, investment uncertainties, negative rates, tech valuation, there is no shortage of event risks in the horizon, making investors understandably listless. Flight to safety is back on, with government bonds and gold rallying.
There are two core concerns: first, globally, if the ongoing contraction in manufacturing activity would spill over into services and begin to weigh down employment, income, and consumption. Second, if the US economy, which has been steady at around 2% real GDP growth, in contrast to slowing momentum in EU, China, and most key emerging markets, is about to follow suit on a much weaker path. Fixed income markets have been clearly signalling that US slowdown, if not an outright recession, is around the corner. The poor reading from September ISM have compounded matters.
Darkening cloud over US manufacturing is understandable, especially as auto and machinery production has been poor. But US manufacturing PMI, along with China’s, is by no means in dire territory. Far worse are the readings from EU, Japan, and Asean.
We still don’t see material spill-over from global manufacturing to the US. The housing market, for instance, has benefitted from lower rates this year, rebounding across a wide range of indicators, including residential permits, construction starts and completions.
There is a reason that US consumers are holding up despite the political noise, trade tensions, and corporate earnings worries, they are employed, and their wages are rising. As long as that trend persists, consumption will likely hold up, in our view. But it is just a matter of time before employment in manufacturing begins to suffer in the face of weakening global demand. It may well be that the US service sector holds up for a while, but short of an easing of trade tensions, reduction in political noise out of Washington, and bottoming of external demand, the US can remain coupled from the rest of the world for only so long. Fed policy makers will have to take into account such risks in the months ahead. While our formal call remains for no further rate cuts this year, the chance of the Fed moving at least one more time this year is clearly rising.
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