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The Yield Curve is Back to Normal, Manufacturing is Picking Up & Space Wine!

A big news item since this spring was that the U.S. government bond yield curve had inverted. An inverted yield curve is when short-term yields are higher than long-term yields and it is one of the closely watched indicators of upcoming slowing growth or a recession. In the last few weeks the yield curve has reverted back to a traditional yield curve where short-term rates are lower than long-term rates. So that economic concern has been taken off the table (at least for now). And many recent economic indicators have been solid. Third-quarter GDP came in at 1.9%. That was a little slower than the 2.0% from the second quarter, but it was better than expected. It's not robust growth, but still solid. CNBC

This year, central banks and governments around the world have been pushing policies to stimulate growth, just like when the Federal Reserve cut rates again last week. So for all the hand wringing earlier this year amid talk of a severe global slowdown and a potential recession, it didn’t happen. And based on the recent indicators, it doesn't appear it will happen in the near future. This is not to say that everything is rosy. We still have trade issues, gridlock in DC, and flat business spending, but moderate growth seems to be where this economy is settling in right now.

This week there are a couple more articles on the health of the economy. For some interesting and fun stuff, there are articles on aging wine in space, the global fertility crash, artificial intelligence, bringing New England mills back to economic life, and how oatmeal can power your athletic performance!

Thank you for reading The Friday Buzz, have a great weekend!

The Economy is Still Creating Jobs: The U.S. Labor Department reported jobs expanded by 128,000 workers, despite 42,000 autoworkers being on strike. That is good news for consumer confidence and spending. WSJ

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The Fed Looks Ahead and Says “Wait and See”

As expected, the Fed lowered short term rates another 0.25% this week, lowering the cost of mortgage, personal and auto loans. Going forward, the Fed said it would want to see the data before committing to another rate cut, noting that the US economy continues to grow and hiring remains strong, notwithstanding weak business investment. (CNBC) Immediately following the announcement, the US stock market reaction was muted. While the China trade conflict and impeachment pots simmer, the Fed narrative re-emerges as a key narrative for the markets.

  • US Economy Slowed Only Slightly in 3Q: The US economy grew 1.9% in the 3Q, down slightly from the 2% growth rate in the 2Q. Consumer spending stayed strong, while business investment retreated. The 1.9% growth was somewhat higher than we expected and will be a factor in the Fed’s thinking going forward. (Reuters)
  • You’re Only as Old as You Feel: It turns out that this expression may have real substance. People who say that they “feel younger” than their chronological age typically are healthier and more psychologically resilient than those who say they “feel older”. Moreover, the discrepancy between chronological and felt age increases with age. Those reaching 70, for example, may feel 15% or 20% younger than their chronological age and be right when it comes to health and psychological metrics.  (New York Times)

Please continue reading for more on the following: Soaring US Deficit; Lonely Planet Loves Maine; Defining Comedy Sketches and an Alzheimer’s Drug Touted. The comedy note is a personal favorite (for what it’s worth!) and is guaranteed to help take the mind off the soaring deficit.

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Housing Sales Fall, Scoring the Trade Negotiations, & Quantum Supremacy!

Most of the news this week focused on political events in DC.  Economic news took a back seat though company earnings for the third quarter were mostly coming in ahead of expectations.  This continued the strong earnings reports that started last week.  As we have mentioned many times in the past, strong company earnings are usually good news for stock markets. 

This week's economic articles are on housing sales, the U.S. and China trade negotiations and the never-ending Brexit saga.  We also have interesting articles on the best plant-based burgers, using dreams to solve problems, how to meditate during a busy workday, and Google achieving quantum supremacy (which sounds like a line out of Star Trek!).

Thank you for reading The Friday Buzz and please forward to anyone who may enjoy the articles!

  • Housing Sales Slow in September:  One of the most closely watched leading indicators for the economy are housing starts.  Last month, sales of homes fell 2.2%.  Even robust employment and lower mortgage rates were unable to overcome a lack of inventory due to labor and land shortages that drove up home prices.  The good news is that buyers are probably out there ready to buy and more houses are set to come onto the market in the coming months.  Wash Post

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“It’s Just That Simple”... China Trade Conflict Dominating US Stock Market

The US stock market is ultra-sensitive to one issue now-the trade conflict with China. The uncertainties around global trade, principally the conflict with China, pose the biggest threat to continued US and global growth. Recalling the signature phrase of the late H. Ross Perot, “It’s just that simple.” The US and China may be nearing a deal that would alleviate the tariff back and forth, even if it fails to address any strategic issues in a meaningful way. (New York Times) Any tariff truce that would stanch the economic bleeding for both countries would be a plus for consumers and investors. (Foreign Affairs)

  • Powell Says US Growth Sustainable: While concerned about global economic headwinds, Fed Chairman Powell remains optimistic that the US expansion can continue. Further rate cuts are not off the table, but it is not clear whether there is an internal Fed consensus on future reductions yet.  (Reuters)
  • Earnings Season Off to Strong Start: US companies are beginning to report on their third quarter earnings, and the initial reports are positive. Investors and analysts will be pouring over the earnings tea leaves. Keep in mind that over the long run, earnings matter more than anything to stock market performance. (CNBC)

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Jobless at 50-Year Low, Buying a Home in Italy for $1 and a Handy Wine Chart!

Last week it was announced the jobless rate continued to fall.  As long as jobs are plentiful and wages grow, it bodes well for continued growth of the economy.  Though jobs are not growing as strongly as previously, they are still growing and a big reason for this economic expansion that has lasted more than a decade. This week we have economic articles on the jobless rate, service sector job growth, plus trade.  There are also articles on how having a positive outlook is good for your heart, Medicare enrollment begins next week, buying a home in Italy for about $1 (What!), and a chart to track the best times to drink wine from different regions and varietals!  Thank you for reading The Friday Buzz!

  • Employment Like It's December, 1969:  Even with the pace of hiring slowing down, the U.S. jobless rate hit a 50-year low in September.  The U.S. economy added 136,000 jobs last month and the jobless rate dipped to 3.5%, down from the August reading of 3.7%.  This is the lowest unemployment rate since December, 1969.  It is also a big reason the economy continues to moderately expand this year even with the headwinds of trade wars, the struggling manufacturing sector and political events.  WSJ CNBC

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Manufacturing - A Flashing Yellow Light

US manufacturing activity slowed again in September, the weakest monthly performance since the summer of 2009. We agree with most business executives, who attribute the contraction to the uncertainties generated by the US-China trade war. (CNN) (New York Times) The manufacturing pullback hits the Midwest, a key 2020 election battleground, especially hard. The already fragile Michigan economy is also reeling from the GM strike, which is now in week 3. While manufacturing only accounts for roughly 10% of US jobs, we still view the slowdown as a flashing yellow light, meaning that investors need to proceed cautiously. It will take a comprehensive trade agreement with China to restart the US manufacturing sector.

  • Atlanta Fed Model Predicts 1.8% 3Q Growth: GDPNow is a favorite tool of financial professionals. It provides a real time estimate of GDP growth, using a similar methodology to that of the US Bureau of Economic Analysis. As the end of a fiscal quarter approaches, it becomes increasingly accurate. With the 3Q over, GDPNow estimates that 3Q growth will be 1.8%. That is slow growth but continued growth, nonetheless.  (Federal Reserve Bank of Atlanta)

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The Impeachment Process Begins in Congress

Impeachment proceedings arrived in the House of Representatives.  It has been a stunning turn of events over the last week.  At the heart of the issue is if President Trump used his government position for personal political gain.  In short, did the U.S. President ask the President of Ukraine to investigate Joe Biden in return for U.S. aid?  President Trump fully admits to asking Ukraine to investigate Joe Biden and his son, who was on the board of a large Ukrainian company, but he does not admit to withholding aid unless they investigated.  It is not hard to connect the dots for a motive as he wants to badly damage a possible opponent like he did in 2016 with Hilary Clinton's email issue (AXIOS).  Or an investigation could knock Joe Biden out of the 2020 Presidential Democratic race.  President Trump would much rather face a Democratic progressive like Warren or Sanders than a political moderate such as Biden.  The motive is there but proving the allegations will be the task at hand for Democrats. 

The Democratic leadership deliberated over a year regarding impeachment proceedings resulting from the Russian allegations and investigation and never moved forward.  House Speaker Nancy Pelosi feared that even if they had the grounds to impeach from a legal standpoint, they would lose in the court of public opinion.  But it only took a week for impeachment proceedings to be launched after the revelations surrounding Ukraine.  With the President directly involved, they feel they have a stronger hand this time.  As more information works its way into the public realm, we'll have to see if public opinion supports this impeachment proceeding.   

How will the markets react to this?  The Russian inquiry had little impact on the markets and as of this week the market reaction to political news was relatively muted.  But with the Ukraine news swirling around President Trump on Wednesday, he announced a trade deal with China "could happen sooner than you think" and the markets moved modestly higher (WSJ).  So far, investors are focused on economic news and ignoring politics. 

What are the ripple effects from an impeachment process?  Will foreign adversaries feel the U.S. is distracted and try to take advantage?  It is not difficult to imagine Venezuela, or even Russia, making a move they wouldn't try on a slow news day.  Will the President feel the need to divert attention to positive news and ramp up efforts to complete trade negotiations with China and other partners (wasn't the timing interesting for the U.S. and Japan to reach a limited trade pact this Wednesday (CNBC)?  Will no legislation make it through Congress now that many committees will be involved in impeachment proceedings?  Who knows where we go from here, but so far this week, things are unfolding quickly.  

There are links and articles to everything happening in DC, and also articles on inverted mortgage yields, megacities and Brexit.  On the lighter side are articles on the perfect age, laughter as medicine (we need this!), and more Ken Burns!  

  • Trump-Ukraine Timeline:  Trying to keep track of all the events, players and details can be tricky.  Hopefully, a timeline can help.  Wash Post

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Iran Strike on Saudi Oil Facilities Seriously Ratchets Up Middle East Tension

The Iranian military strike on Saudi Arabia’s oil production capacity is ominous. Oil prices should stabilize soon, but the probability of military conflict in the Middle East, directly involving the U.S. and its strategic allies (e.g., Saudi Arabia and Israel), is escalating dramatically. Iran apparently believes that military provocations are its best strategy to force the U.S. and its allies to negotiate the removal of economic sanctions and to achieve de facto acceptance of its nuclear weapons. 

Back in the U.S., as we anticipated, the Fed continued its balancing act by lowering short term rates this week by 0.25%, managing to alienate both the “doves,” like President Trump, who wants negative interest rates, and the “hawks“ who argue that a supposedly data driven Fed should not cut rates at all. After all, inflation is showing signs of ticking up and employment is strong.

Want another take on the 2020 election beyond talking heads, debates, tweets, emotional dinner conversations and opinion polls? There are websites that allow wagering on elections, letting us know what people, who are willing to put their money where their mouth is (to use the old cliché), are thinking.

We also share notes on the U.S. consumer and negative interest rates, which are being experienced in other parts of the world. Prefer something lighter? We touch on climate change (that is ominous too-sorry!) the power of reading, insights into what makes men happiest (spoiler alert-it’s not food) and country music (of all things). We hope you enjoy.

  • Trump’s Greatest Crisis? Greg Valliere, the astute Washington political insider, posits that the current Iranian and Saudi Arabian conflict presents President Trump with his biggest crisis to date. I have trouble seeing this conflict ending well. Even with China, we share a common interest in avoiding an economic slowdown. Where are the strategic commonalities with Iran? President Trump has no good options. He is understandably averse to using military force, but risks being perceived as weak in the absence of credible responses to brazen attacks on an important ally. Might he “greenlight” an ally to launch a major preemptive strike on Iran? (AGF Investments)

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The ECB Acts, Gig Economy Regs, Biological Clock Rewind & Flying Cars in NH!

This week, the European Central Bank (ECB) met to discuss monetary policy and next week the Federal Reserve Bank will do the same.  These are important meetings as central banks are at a crossroads as to how aggressively to confront a slowing global economy.  The biggest challenges they are facing are geopolitical events such as the intensifying trade war and Brexit.  It is not clear how those events will unfold in the coming months or how fully they will affect economic growth. 

Growth in Europe is currently flat.  On Thursday, the ECB unveiled a plan to cut interest rates and provide stimulus with quantitative easing.  It was not the bazooka some were expecting but was a very good sized package that also left the door open for future actions.  In their comments following the meeting, they stated the bank will do everything it can to support the economy.

The Federal Reserve has less reason and urgency to act as aggressively as the ECB.  The U.S. economy is growing approximately 1.5% - 2.0%, though the growth is uneven.  U.S. manufacturing is slowing, or even contracting, due to the trade wars, but the service sector is solidly growing.  And the service sector is a much larger component of the U.S. economy.  So the expectation is that the next week the Federal Reserve will take a more measured approach and probably cut short-term rates .25%.  Investors will also be paying attention to the Fed comments on how they plan to navigate the coming months.

In this week's The Friday Buzz we share an article on the ECB as well as articles on U.S. job growth, how the gig economy is getting new regulations, emergency savings accounts for individuals, how researchers are testing how to turn back the biological clock, global economies over two thousand years and flying cars!  We were also touched to receive a letter from a Camp Sunshine family.  Thank you for reading!      

  • ECB Meeting:  The ECB cut interest rates from -0.4% to -0.5% (yes those are negatives) and on November 1st will restart quantitative easing with monthly purchases of bonds to the tune of $22B.  They are hoping the measures will jolt economic growth higher but are prepared to do more if necessary.  Also, Christine Lagarde is preparing to step in to head the bank on November 1st when Mario Draghi's eight-year term ends.  The Brexit deadline is October 31st so Ms. Lagarde's first day could be a wild one.  Bloomberg  Time

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Civil War Brewing at the Fed?

Financial eyes are on the upcoming Federal Reserve interest rate setting meeting, scheduled for September 17th. Barring a surprise, it will take place against the backdrop of the chilling effect of the China trade conflict on economic growth. The U.S. central bankers, who vote on interest rate policy, are not in complete agreement on the degree of threat to the economy. Some favor a rate cut of 0.50% or more, while others believe that the current economy, with strong consumer spending and near full employment, does not warrant any rate cut. Look for Chairman Powell to gather the votes for a 0.25% rate cut, as a measured attempt to support the economy.

Meanwhile, Hurricane Dorian is rampaging up the U.S. coast, leaving a trail of suffering and economic destruction. It has also caused us to take a second look at the risk of hurricanes, particularly in Florida, where a significant number of firm clients own homes and/or vacation. 

There is more: a political insider lays out his top ten fall issues and predictions; encouraging news for optimists; ideas for fall travel in New England and beyond; and two entertainment suggestions. We hope you read and enjoy!

  • Dueling Fed Views: As noted above, there is an internal policy debate at the Fed on how much stimulus, if any, is needed by the U.S. economy. One camp favors a more proactive effort to stimulate the economy with a hefty rate cut, while the other comes from a “minimum effective dose” (or no dose at all!) perspective. (Reuters) (Washington Post)

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