ANXIETY: U.S. stocks were having another positive week until Friday. On Wednesday, the Federal Reserve bank held a press conference following a two-day meeting. The Fed essentially removed a major source of uncertainty by indicating that it will hold interest rates steady for the year. Thursday, therefore, propelled stocks higher. On Friday, the markets could not overcome bad news. A report indicated that Germany’s manufacturing industry shrank at the quickest rate in more than six years. Another report showed that France’s private sector sank into contraction. These are the eurozone’s two biggest economies. Meanwhile, a closely watched U.S. manufacturing index, the U.S. Manufacturing PMI, slid from 53.0 to 52.5 (anything above 50 means growth), the lowest reading since August 2017. All this, and the negative yield curve data (see below) created too much anxiety for investors, and the S&P 500 fell nearly 2% in one day, leading to a negative week.
YIELD CURVE WORRIES: I have discussed the inverted yield curve issue in the recent past. When the yields you can get on a long-term bond you buy on the open market is less than the yields you can get on a shorter term bond, it has long been viewed as a precursor to a recession. It essentially indicates that too many people have more confidence in the short term than the long term, meaning a recession is going to happen in the interim. An oft-reviewed formula is the difference between the yield on ten-year U.S. Treasury Notes and three-month Treasury bills. On Friday, the yield on the ten-year note dropped to 2.44%, just under the 2.45% yield on the three-month bill. When this happens, it has been a reliable predictor of recessions, but the lag between the “indicator” and the actual recession in the past has not been immediate, and a one-day inversion has not been the clear signal. It is when the inversion persists, generally for a few months, before it is a nine to eighteen-month leading indicator. So we watch.
THE FED’S STATE OF THE ECONOMY: At last week’s news conference, the Fed stated that the U.S. economy “is in a good place” and is expanding at a “solid pace” in 2019, though slower than last year’s “very strong pace.” The Fed downgraded its prediction for GDP growth for 2019 from the 2.3% it predicted in December to 2.1%.
EXISTING HOME SALES JUMP: Sales of existing homes rebounded strongly in February jumping 11.8% from January. Sales in February were down 1.8% from February of one year ago. The existing inventory of such homes increased to 1.63 million from 1.59 million in January, but this is more of a seasonal jump. As you can see from the graph below, inventory of existing homes for sale continues to trend in a negative direction.