There was little news about real GDP last week: The Federal Reserve Bank of New York nowcast continues to stand at 1.8% for 2019:Q3. The real news was:
- A change from one week ago: The market continues to lower interest rates at the long end of the yield curve.
- A change from 1 month ago: The Trump trade war picture becomes increasingly confused and irrational.
- * **A change from 3 months ago: A no-deal Brexit is now not just a possibility, but more likely than not.
- A change from 6 months ago: The Federal Reserve has—behind the curve—become convinced that it raised interest rates too much in 2018, and is now likely to cut them.
- A change from 6 months ago: Trump trade-war tensions are higher.
We saw another twenty-five basis points of market easing at the long end of the yield curve: the 10-Year TIPS yield is now negative. The market has now delivered 170 basis points of easing in the 10-year Treasury window since the end of last October, and 140 basis points to the 30-year bond. On the 30-year bond, you would have made a 30% profit if you bought it last October and sold it today, compared to a 3.5% profit on the S&P Composite over the same period. That is a major, major sentiment shift. That means that a number of people short debt with riskier operations than the S&P Composite are about to face margin calls and rollover difficulties. We will shortly see how solvent the market judges them.
No, it is not yet August 2007. But it is much closer to August 2007 than I expected to see for another generation.
- The Federal Reserve has, largely through jawboning, eased policy substantially over the past six months.
- The trade wars that Trump is waging is a major source of uncertainty, and a possible recession risk.
- U.S. potential economic growth continues to be a hair above 2%/year.
- There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating or of needed interest-rate normalization: secular stagnation continues to reign.
- The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America. But it has been a success in making the rich richer and thus America more unequal. Those who beat the drum for it owe us an explanation for why they got it wrong. They have not provided one: shame on them.
#macro #forecasting #highlighted