In recent trading sessions, investors have been faced with a series of signals that global growth could be set to slow.
The U.S. yield curve inverted, just as the yield on 10-year German government bonds turned negative. Both events are considered harbingers of a global downturn.
A JPMorgan report observed that “the yield curve has steadily flattened and is now significantly inverted, predicting a 56% probability of recession within one year in our model.”
Analysts at Capital Economics threw shade on the potential for an economic downturn, as “the exact timing of recessions is notoriously hard to predict and any claims to the contrary should be viewed with caution.”
The CapEcon team expects GDP growth to slow sharply this year. Although they don’t think a recession is likely in the near term, they would place the risk of a recession developing at some point over the next 12 months at around 30%.
They say they have “far more confidence” in a belief that, when the next recession does inevitably arrive, it will be fairly mild by past standards.
Household debt burdens are low, corporate balance sheets are fairly healthy and there are few signs of the kind of over-investment or asset price bubbles that preceded past downturns.
As a caveat, though, CapEcon adds: Even a mild recession could pose problems for the Fed, however, as there would be a strong likelihood that interest rates would once again end up stuck at the zero lower bound.
Data released Thursday showed the U.S. economy grew at a slower rate than initially estimated in the fourth quarter. Gross domestic product, a broad measure of goods and services produced across the economy, rose at a 2.2% annual rate last quarter, the Commerce Department said.
Many analysts believe most investors have already priced in the slowdown in earnings growth. Earnings at S&P 500 companies are expected to fall 3.8% from a year earlier, according to FactSet, which would mark the first year-over-year profit decline for large U.S. companies since the second quarter of 2016.
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Some positive news crossed the wires late in the week. The Wall Street Journal noted that the average rate on a 30-year fixed mortgage was down nearly a quarter-point this week from a week earlier, its biggest drop in over a decade! That is a rate low enough to help jump-start the housing market again.
The average rate on a 30-year fixed mortgage fell to 4.06% this week, its lowest since January 2018, according to data released Thursday by Freddie Mac, the mortgage-finance giant. The rate was down nearly a quarter-point from a week earlier, its biggest drop in over a decade.
In many cases, the WSJ observes that rates are lower than 4%. Lenders advertising mortgages at sub-4% rates this week include Toronto-Dominion Bank , HSBC Holdings and Teachers Federal Credit Union, according to Bankrate.com.
Just a few months ago, average rates were on the verge of hitting 5%, drying up refinancings and putting a damper on home price growth.
While the housing market remains cooler than it had been at its peak, the WSJ reports that lower mortgage rates are again raising hopes for a rebound as the spring selling season gets underway.
Mortgage rates have been declining along with the yield on the benchmark 10-year Treasury note. The moves have been spurred by the Federal Reserve’s decision to pause its interest rate increases in synch with investor malaise about the expected pace of economic growth for the rest of the year.
SPDR Homebuilders (XHB) hasn’t reacted much to this development, but we’ll keep an eye on it, along with individual names like Pulte (PHM) and Toll Brothers (TOL).
Even better than those names, I would look at the shares of hardware and lumber retailers like Home Depot (HD), which look buyable immediately, as they are still way below their record highs hit last September.
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Caution from the Federal Reserve and optimism about a U.S.-China trade agreement have supported the market recovery early in 2019. But now, anxiety about slowing economic growth has stoked fresh volatility.
Veteran market strategist Megan Horneman said the environment is “confusing” because growth levels are out of sync around the world. “That’s causing a lot of inconsistencies and discrepancies across asset classes,” she said. True that.
The Financial Times points out that traders are now betting that there is an 80% probability of the Fed trimming rates at least once this year — and a meaningful chance of several cuts. I mentioned this possibility as an out-of-the-box idea a few weeks ago and now it’s going mainstream.
March’s fixed-income rally has been broad-based, buoying the debt of virtually every highly rated government. The FT notes that Germany even sold 10-year bonds with a negative yield for the first time since autumn 2016 on Wednesday.
Growth prospects are dimming in Asia, Europe and the United States. The European Central Bank and the Fed have as a result sounded much more dovish lately. This kind of worrying among policy leaders makes investors even more nervous. “When Doves Cry” is not a Wall Street anthem.
“If you look across the globe, with almost total uniformity, you’ve had a similar degree of rallying in Treasuries, Gilts, Bunds and even in Australia,” said Scott Thiel, chief fixed-income strategist at BlackRock, to the FT. “This is not an individual reaction to something idiosyncratic. It’s a broader risk-free rate rally.”
The gloom appears to be spreading. The Reserve Bank of New Zealand kept interest rates on hold earlier on Wednesday, but warned its next move is more likely to loosen monetary policy than tighten.
In one example of seemingly counterintuitive market moves, gold prices fell sharply again in the past week. Prices of the metal have pulled back from last month’s 10-month high — even with jitters about the economy mounting and some investors moving toward safer assets.
So far, the equity market has been hanging around its October-November 2018 highs, unwilling to commit either to a sprint back toward the all-time highs in September 2018 or a collapse back to the December lows for a test.
Such stalemates rarely last long. Prepare for a stunning directional move to clear the indecision by the end of April.
Best wishes,
Jon D. Markman
