The main idea I want to talk about today is the notion that our economy will continue to expand (no recession) as long as consumer spending remains healthy and continues to grow. This is the primary case being made by those who are watching business spending deteriorate, but who don’t believe we’ll enter a recession.
The fickle and herd-like nature of the financial markets is on clear display right now, as conversations about the yield curve again take center stage. Last week, the 10-year note yield momentarily dipped below that of the 2-year yield (it did not close below that mark) and this has set off a frenzy of commentary that in my opinion, is completely misplaced.
Interest rates have been the primary focus of investors lately, and for good reason. A glance at the chart of the 10-year Treasury note yield below shows that while rates have been steadily declining for nearly a year, that move accelerated sharply during the last two weeks.
In last week’s commentary I mentioned that the Treasury does a biannual review on the currency practices of foreign governments. In five such reviews under the Trump administration, the Treasury department has declined to label China as a currency manipulator. That all changed yesterday.
Mr. Powell and the Fed continue to claim that their actions are data-dependent, but the question is beginning to arise: What data are they dependent on? The fact that many Fed officials have referred to this as an “insurance cut,” almost by definition suggests that fundamental economic data doesn’t justify a move lower.