Bassanese Bites: Unnerving Inversion – August 19 2019

Inversion of a key US yield curve measure (the gap between US 10-year and 2-year Federal Government bond yields) sent jitters through Wall Street last week, as did further signs of softer economic growth in Europe and China. The global stock pull back continued as did the rally in bond and gold prices.

As I’ve previously argued, I think the inversion of the US yield curve is not necessarily sending a signal of impending recession or bear market – and even if it were, history suggests we’ve got at least a year to keep dancing.

That said, other concerning news was a negative print for German Q2 GDP and much weaker than expected industrial production and retail sales in China.  US manufacturing output was also weak in July.  As a major capital goods exporter into Asia, Germany is among those most exposed to ongoing trade tensions, especially given growing signs of postpone in corporate investment plans.  China’s slowdown is also trade induced, though new emissions standards appears to be at least temporarily also hurting car sales.  Importantly, both the European Central Bank and Chinese authorities last week signalled further policy stimulus may be in the pipeline.

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