Stone's Weekly Market Guide - Week of May 20, 2018
May PMI data on Wednesday provides a reading on global economic strength: U.S. Manufacturing PMI is expected to hold steady at an elevated 56.5 while Europe eases to 56.0 from 56.2 and Japan could fade a bit from its 53.8 reading in April. Readings should be consistent with some cooling in economic activity outside the U.S. Recall that readings above 50 are generally consistent with growth.
Some have expressed concern about the flattening of the yield curve and implications for U.S. growth. While it is true that the yield curve has a track record of predicting recession better than any economist I can name, our Chart of the Week shows that the spread between the U.S. 10 and 2-year yield remains at a very normal level historically. The inversion (2 year > 10 year yield) of the yield curve in 1978, 1980, 1989, 2000 and 2006 correctly predicted recessions on average of about one and a half years later. The curve steepened last week and data actually shows the U.S. economy strengthening.
The possible trade war with China seems to have cooled this week with U.S. Treasury Secretary Mnuchin announcing that the two sides were "putting the trade war on hold." U.S. data reported this week includes: April new and existing home sales are expected to decline slightly month-over-month. Durable goods orders for April are expected to decline, but removing the volatile transportation component reveals an improving trend expected for the month. Plenty of Fedspeak along with the FOMC minutes for the bond market to monitor. Markets are currently pricing in a 100% chance of a Fed hike in June.
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