October 2019 Economic Review

A Tale of Two Cities

With another month and two interest rate cuts under our belts, the U.S. economy looks no less uncertain. Economic indicators appear to be diverging and trade tensions have escalated instead of settled, all while the global growth picture is dimming. Currently, investors are looking toward the October FOMC meeting for another cut though it is far from certain whether the Fed will cut again this year and if so, how many more times.

U.S. manufacturing, as measured by the Institute for Supply Management (ISM) Purchasing Manager’s Index (PMI) continued lower into contraction territory with a reading of 47.8, the lowest reading since June 2009. It is no secret that U.S. manufacturing has been hit hard by the U.S.-China trade war, but the ISM Non-Manufacturing Service NMI is also showing signs of weakness having registered its lowest reading in three years albeit still expansionary.

Contrast this with recent U.S. employment data. The unemployment rate in September hit 3.5%, the lowest level in 50 years. Non-farm payrolls and wage growth were soft but still showed significant hiring and a tight job market. Inflation remains below the Fed’s 2.00% target with an August core PCE value of 1.7%. With these divergent economic indicators, one has to ask, where do we go from here?

The market has already priced in an October interest rate cut and recent headlines suggest that principal level trade talks between the U.S. and China will not yield any material agreements. Manufacturing is weak but by all measures, the U.S. consumer appears to be strong. Considering consumer spending accounts for approximately 70% of growth in GDP, the main concern is whether the uncertainty in the economy will lead Americans to spend less.

Treasury Yields
Maturity 10/9/19 9/9/19 Change
3-Month 1.679% 1.951% -0.272%
6-Month 1.670% 1.872% -0.202%
1-Year 1.579% 1.765% -0.186%
2-Year 1.428% 1.594% -0.166%
3-Year 1.390% 1.534% -0.166%
5-Year 1.374% 1.500% -0.144%
10-Year 1.561% 1.645% -0.084%
30-Year 2.064% 2.129% -0.065%

Agency Yields
Maturity 10/9/19 9/9/19 Change
3-Month 1.736% 1.944% -0.208%
6-Month 1.847% 1.861% -0.014%
1-Year 1.813% 1.740% 0.073%
2-Year 1.559% 1.709% -0.150%
3-Year 1.467% 1.617% -0.150%
5-Year 1.422% 1.574% -0.152%
Commercial Paper Yields (A-1/P-1)
Maturity 10/9/19 9/9/19 Change
1-Month 1.910% 2.100% -0.190%
3-Month 1.960% 2.100% -0.140%
6-Month 1.930% 2.040% -0.110%
9-Month 1.850% 1.950% -0.110%
Current Economic Releases
Data Period Value
GDP QoQ Q2 ’19 2.00%
U.S. Unemployment Sept ’19 3.50%
ISM Manufacturing Sept ’19 47.80
PPI YoY Sept ’19 -0.20%
CPI YoY Aug ’19 1.70%
Fed Funds Target October 9, 2019 1.75% – 2.00%

Source: Bloomberg
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