Short end of the yield curve inverts. The spread between 3- and 5-year, as well as 2- and 5-year Treasury yields turned negative yesterday for the first time since July 2007, though neither are reliable indicators of a pending recession. Instead, investors are effectively putting the Federal Reserve (Fed) on notice that its projected path of rate hikes between now and the end of next year is too aggressive. Fed fund futures currently suggest we’ll likely see two hikes next year at most, which aligns with our outlook, as global investors (and the Fed) start to appreciate the effects of the Fed’s balance sheet reduction, the impact of dollar strength, and the lack of threatening wage pressures.
Manufacturing activity remains robust. The Institute for Supply Management’s manufacturing index for November (59.3) came in ahead of consensus expectations for a 57.5 reading, up 1.6% m/m. New orders were up 4.7%, while the prices component was down 10.9% (showing increasing prices), with aluminum the most cited commodity up in price. Respondents flagged shortages, longer lead times, and tariffs as headwinds, though a healthy business environment and steady orders were positives. Final US Markit PMI Manufacturing for November (55.3) came in slightly below the 55.4 estimate, though new orders increased at fastest rate since May. Overall, manufacturing activity remains firmly in expansionary territory.
Rate hike expectations drop. Market expectations for rate hikes dropped significantly last month as strengthening economic headwinds weighed on investors. In an LPL Research blog due out later today, we’ll highlight Fed fund futures’ implied probabilities for rate increases next year, and provide our thoughts on the Federal Reserve’s recent rhetoric around policy.
NEW LPL Market Signals Podcast. In our latest episode, listento LPL Financial Chief Investment Strategist John Lynch and Senior Market Strategist Ryan Detrick discuss the Fed, trade issues with China, and the price of crude oil on the economic climate and what it holds for the near future. Subscribe to the free Market Signals podcast series on iTunes, Google Play, Spotify, or wherever you get your podcasts!
Monitoring the Week Ahead
- Eurozone PPI Report (Oct)
- ADP Employment Report (Nov)
- Markit US Services PMI (Nov)
- ISM Non-Manufacturing Index (Nov)
- Fed Beige Book
- Trade Balance (Oct)
- Initial Jobless Claims (Dec. 1)
- Durable Goods Orders (Oct)
- China Foreign Reserves (Nov)
- University of Michigan Sentiment Index (Preliminary, Dec)
- Jobs Report (Nov)
- Japan Leading Index (Oct)
- Germany Industrial Production (Oct)
- Eurozone GDP (Q3)
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