Market Summary

Economic growth has slowed from earlier this year and the consensus forecast calls for a further slowdown in GDP growth next year to a level consistent with trend growth. We are not anticipating a recession within our 6-month outlook horizon. We believe that the impact of monetary policy on economic growth is somewhat lagged, and the more accommodative monetary policy stance of the Federal Reserve and other global central banks through 2019 should provide a tailwind for an ongoing slow economic growth environment heading into 2020. However, an uncertain outlook on the future path of global central bank policy, lingering uncertainty about trade policy and Brexit, and the upcoming US Presidential election potentially sets the stage for a continued volatile financial market environment heading into the new year.

The Federal Open Market Committee (FOMC) lowered the target fed funds rate by 25 basis points for a third time this year to a range of 1.50%-1.75%. The Fed indicated household spending continues to rise at a strong pace, but business fixed investment and exports remain weak. Market-based measures of inflation compensation also remain low. During the press conference, Fed Chair Powell said the FOMC believes the current stance of monetary policy is likely to remain appropriate as long as economic data remains consistent with their outlook. Chair Powell’s comments suggested that the Fed anticipates keeping monetary policy on hold over the near- to intermediate-term, but they haven’t ruled out the possibility of providing further accommodation if the economy weakens further. Fed Chair Powell indicated that the current fed funds rate range is “somewhat accommodative” and without a material improvement in inflation expectations we expect monetary policy to remain accommodative.

The Treasury yield curve continued to steepen modestly in October. During the month, the 10-year US Treasury yield rose above the yield on the 3-month T-bill. This portion of the yield curve had been inverted since May 2019 (with a brief exception in July). The 3-month T-bill yield declined 28 basis points in October to 1.52%, the 2-year Treasury yield decreased nearly ten basis points to 1.52%, and the 10-year Treasury yield increased about three basis points to 1.69%. We believe the recent curve steepening has been driven by the Federal Reserve lowering short-term rates, as well as more favorable developments with regard to global trade and Brexit which have pushed up longer-term European sovereign bond rates as well as US Treasury rates.

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