"There are limits to monetary policy " Ben Bernanke

Trade disputes here and across the pond continue to make headlines and influence market sentiment. Bonds continue to be well bid as uncertainty remains. There have probably been enough press on Brexit and the politics behind Boris Johnson’s decision to suspend parliament. The reaction from capital markets was limited, the pound did fall but only modestly against the US dollar. The ten-year gilt yield did not move; however, at 44 basis points, the yield remains meagre at best. The latest UK and euro area business and consumer confidence surveys did reinforce the view that the uncertainty is having something of an impact on both economies. At some point that may influence both sides to come back to the discussion table. The FTSE 100 seemed more interested in the positive reaction to the continued hopes that China and the US will agree on their trade negotiations, the machinations of Brexit.

We have pointed out that recent US economic data has mildly surprised to the upside as indicated by the improvement in the Citi economic surprise index. The latest estimate of second-quarter growth for the world’s largest economy released on Thursday came in at 2.0%, pretty much in line with expectations. Despite this, there remain plenty of leading indicators that suggest the US economy is continuing to slow. For example, railroad shipping traffic statistics trending lower, the recent fall in the Markit Services Purchasing Manager Survey another. More households, according to a recent poll think the US economy is getting worse. Despite US employment remaining close to historic lows and wages continuing to grow.

The inversion of the US yield curve continues, another possible signal that the US economy is heading for a recession. With the added influence central banks are having in the bond market today, and as a result of German ten-year bund yields falling further into negative territory, It may be right to question whether using this is as reliable an indicator as it may have been in the past.

The S&P 500 looks like it might break a four-week losing spell this week. Equity investor sentiment remains wary for the fundamental reasons often mentioned. We continually discuss the discrepancy between the lack of yield in the bond market and the uncertainty in the equity market. The rally in bonds has resulted in the top-rated European firms being able to borrow at near-zero interest rates. The issuance of debt to retire equity must surely continue. It feels odd unless some external factors come to play, to believe that equity markets cannot help but be supported by the current situation, at least for now.

Posted on August 29, 2019 .