Aura Global Insights – Issue No. 27
HUMPTY NOT DUMPTY (RECESSION)
The storyline remains colourful with the recent attack by Iran on Saudi Arabia’s oil infrastructure, trouble in the repo market, and the Federal Reserve (Fed) cutting its benchmark short-term interest rate to a target range of 1.75% to 2.00%, with an uncertain future policy. Yet the US equity markets have proven resilient.
To reiterate previous comments with respect to the Fed, Chair Jerome Powell indicated concern over slowing global growth and trade uncertainties but said the Fed stands ready to “act as appropriate to sustain the expansion.” The communication from the Fed is that we are not on the brink of a recession. Economic numbers have been good with housing starts and building permits in August hitting their best levels in more than 10 years and the increase in industrial production recently being the largest gain of the year.
The key to the US economy and the financial markets is in the wallets of the consumer. US unemployment at 3.7% is at the lowest level in 50 years. Wage gains have climbed to 20 year highs and consumer confidence remains at a historically high level. The largest threat to the markets is the negative effects of the ongoing trade war (spilling into the manufacturing sector) and weak global growth which could slow the trajectories of corporate profits and cut into business and consumer confidence.
Deteriorating trends in the manufacturing sector garner plenty of attention however, its primacy is somewhat fading as non-manufacturing business activity is increasing and taking up the slack. Non-manufacturing activity is relatively robust and economic data overall has shown a renewed ability to surprise to the upside.
The bottom line: Whilst the US economy is showing quite a bit more Humpty than Dumpty (vivacity) than it is being given credit for, excessive investor optimism argues that stocks may experience a consolidation phase before the current equity rally continues.
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