Business confidence continues to move sideways as uncertainty continues to plague business leaders’ expectations for the future. In addition to the already back-and-forward and hopeful bit-piece headlines about an agreement with China on trade, the 2020 presidential election is a looming uncertainty. A Trump victory would mean more pro-business initiatives buoying business executives, while a Democratic win would mean a focus on social and fiscal legislation. Regardless of the outcome, it would add a dose of certainty for businesses on the expected economic climate for the next four years.
*WTI Crude Oil Spot Price. Data points through end of November 2019. Change represents month-over-month change.
The ISM Manufacturing index continues in contraction territory for the third straight month. The trade war with China rages on and new trade disputes with other trading partners continue to put pressure on domestic manufacturers. Although headlines continue to arise about a possible trade deal, manufacturers can only hope a deal is struck soon. The ISM non-manufacturing index on the other hand continues in positive territory with the services sector seemingly unfazed. Although the index level has decelerated from 2018 highs, it is in line with current cycle averages. Although the Non-Manufacturing index suggest that the prolonged economic expansion has some room to run, the lagging Manufacturing index is signaling caution.
The healthy U.S. economy is failing to show up in the trade numbers. The value of exports and imports are down on a quarter-over-quarter and year-over-year basis for the first time since early 2016. The U.S.-China trade war continues to be a drag and while imports were a bright spot, they too declined by 1.0% from the same quarter in 2018. While a rising dollar does not help exports, it should boost imports as consumer confidence remains near current cycle highs and the labor market strong. However, the uncertainty of a trade resolution between China and the U.S. will ultimately lead to higher prices for consumers as the trade war runs on.
Private fixed investment in equipment and other capital projects continues to decelerate in 3Q19. The figures for the quarter are the slowest pace of investment seen since late 2016 and early 2017 period. The increase in economic uncertainty globally and the unpredictability of the 2020 U.S. presidential election means more business investment will likely be put on hold. This could have adverse effects on the strong labor market. Looking forward, the labor market should be monitored closely for any spillover effect from continued deceleration in business investment growth.
Investment grade corporate bond spreads have bounced between a narrow band over the last few months. The combination of lower interest rates and investor appetite means the corporate-bond-to-10-year treasury spread is largely in line with its long-term average. However, investor appetite for higher yielding debt continues to be a sought-after menu item in the credit segment as investors chase higher returns. The spread between high yield corporate bonds and investment grade corporate bonds has increased by 51 bps over the last six months at the same time the spread between investment grade and treasuries has barely budged.
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