Gale-Force Trade Winds

Trade tensions have dominated market news for the past month. A trade deal with China has not emerged, leading to a significant rise in tariff rates and an expanding set of industrial restrictions. A threatened U.S. tariff on imports from Mexico was avoided at the last minute, but the administration’s willingness to use trade restrictions as a weapon has not diminished.

Turning points in business cycles can only be identified in hindsight. Those who have lived through them recall feelings of uncertainty, heightened sensitivity to new information and an increasing emphasis on contingency planning. Those old feelings are coming back to us today. Our baseline still does not call for a recession, but downside risks are growing.

Key Economic Indicators

Influences on the Forecast

  • Comments from Federal Reserve officials have hinted at willingness to intervene in markets if support is deemed necessary. Conditions are deteriorating, and we believe the Federal Open Market Committee will respond with two rate cuts in the second half of 2019. While markets are widely anticipating at least one cut this year, we caution against excessive jubilation; the Fed’s recent mantra of patience means a cut would only take place after conclusively poor economic data has started to arrive.
  • Uncertain market conditions have weighed on the fixed income market, with yields on Treasury debt falling. The spread between 3-month and 10-year Treasuries has gone negative, more substantially and durably than the brief inversion in March. The risk-off sentiment prompted by trade uncertainty has caused global flows into all tenors of Treasuries, lowering yields across the curve.
  • The May employment report disappointed, with only 75,000 jobs created. Employment growth was effectively zero, with last month’s gains negated by downward revisions to the prior two months’ payroll estimates. The unemployment rate held at 3.6%. The labor force participation rate has undone much of the gain witnessed in the second half of 2018. Encouragingly, initial jobless claims continue to hold at low levels, suggesting a labor market in stasis, with no substantial workforce reductions yet.