Markets bracing for end to US growth run

Markets bracing for end to US growth run

Markets are becoming increasingly worried about the prospects for the US economy.

The economy continued to perform strongly in the opening quarter of this year. GDP grew by a healthy 3% annualised, employment continued to expand at a strong pace, while the country's unemployment rate fell to 3.6% in April, its lowest level in almost 50 years.

Markets, though, don’t think this will last. The US yield curve is widely watched as a signal of future economic trends. A yield curve shows interest rates on the same type of debt over different maturities. Normally, the longer the maturity of the debt the higher the interest rate. However, if the curve inverts and long-term interest rates drop below short-term rates, it is often seen as a sign of slower growth ahead that could trigger rate cuts.

In this regard, the markets pay very close attention to the gap between the three-month US treasury bill rates and 10-year treasury bond yields as it has turned negative ahead of every US recession in the past 50 years.

The past couple of weeks have seen the gap between three-month and 10-year treasuries turn negative, dropping to -20 basis points, its lowest level since 2007, just ahead of the last US recession.

Futures contracts are now pricing in a 25 basis points Federal Reserve rate cut by the end of the year, with an increasing probability of two further rate cuts in 2020.

Fears that the yield curve inversion is signaling a recession ahead have undermined sentiment in equity markets. US stock markets fell by some 7% in May. Sentiment has not been helped, either, by some recent weak US data, which came in well below expectations - including falls in retails sales and industrial production.

US data for May also made for worrying reading. The manufacturing index fell to 50.6 from 52.6 in April, its lowest level since September 2009. Meanwhile, the services index fell to 50.9 from 53.0.

The data point to a marked slowdown in US business activity, with the indices now just above the 50 level that signals continuing expansion.

Caution, though, is warranted about reading too much into recent yield curve trends. Sentiment in both markets and the economy has been hit by the escalating trade war between the US and China, which is now also becoming a technology war.

This is another factor driving investors into the safe haven of US treasuries, pushing yields lower. Furthermore, on most occasions when yield curves invert, it is caused by central banks raising short-term interest rates, which can lead to a recession.

This time, though, it is falling long-term interest rates that is at work. Thus, the previous strong relationship between yield curves and recessions may not hold this time around.

One other factor that may be weighing on sentiment is that this month will see the current US expansion become the longest on record. Thus, naturally, there are concerns that the expansion could soon end.

The fiscal stimulus that boosted the economy last year is fading, while the lagged effects of the monetary tightening in 2017 and 2018 may be impacting activity.

Global growth has also weakened in the past year, against the backdrop of rising trade tensions.

Markets will be keeping a very close eye on data in the months ahead to gauge whether we are witnessing a moderation in US growth to more sustainable levels, or a much deeper downturn in the economy.

Oliver Mangan is chief economist at AIB

More on this topic

Trading Up: Three bedroom in Ballinlough, Cork €310,000Trading Up: Three bedroom in Ballinlough, Cork €310,000

Upgraded home perfect for those wishing to downsizeUpgraded home perfect for those wishing to downsize

Tiger found resting in house after flooding in IndiaTiger found resting in house after flooding in India

Mini tornado hits village in the UKMini tornado hits village in the UK

More in this Section

Performance of Irish bank shares to face heavy scrutiny in coming weeksPerformance of Irish bank shares to face heavy scrutiny in coming weeks

Brosnan bloodstock posts loss of €2m due to heavy cost provisions Brosnan bloodstock posts loss of €2m due to heavy cost provisions

Liberty London sold to new owners in €334m dealLiberty London sold to new owners in €334m deal

Supermarkets cash in as TV and jewellery shops fail to shine in early summer sales, says major surveySupermarkets cash in as TV and jewellery shops fail to shine in early summer sales, says major survey

More by this author

All eyes on interest rates around the worldAll eyes on interest rates around the world

A return to a 'normal' housing market is still some way offA return to a 'normal' housing market is still some way off

Strong dollar could be tested by Fed rate cutsStrong dollar could be tested by Fed rate cuts

Why ECB rate cut may not be good news for allWhy ECB rate cut may not be good news for all


Lifestyle

Garbage offered a pop twist on grunge’s maximalist angst when they materialised in a dramatic swirl in the mid-Nineties. Like a candy-cane Nirvana, they were bleak and baroque but with tunes you could hum in the dark.Garbage's return to Dublin well worth the wait

Circle back to fashion's hottest retro print, says Annmarie O'Connor.Trend of the Week: Circling back to fashion's hottest retro print

Ever wondered what it would be like to move lock, stock and barrel into a tiny home, like the ones on Netflix’s Tiny House Nation?Are you ready to join the tiny-house movement?

Kya deLongchamps reports back on the performance of her photovoltaic array and wonders if it could handle the addition of an electric carDIY: Get ready for a natural high

More From The Irish Examiner