Where Do We Go From Here?

Mar 25, 2019
Person holding a compass over a map

Where Do We Go From Here?

There was a lot that happened last week from the FOMC to delays in trade deals to Brexit extensions to weak overseas numbers, but perhaps the biggest event was the 3mo/10yr yield curve inversion. Friday’s Treasury rally followed weak German and French manufacturing numbers that signaled a deepening in the European slowdown. The rally caused the 3mo/10yr curve to invert for the first time since 2007. In the last two easing cycles, inversion of this curve has been a prelude to the Fed cutting rates. A week ago, we were concerned the Fed may forecast more rate hikes, and instead, we are staring at rate cuts being the next move. That being said, there are still things that can go right in the economy and we’ll get a look at some releases that may give us clues. Last Friday’s stellar February Existing Home Sales Report was lost in the bond rally news but we’ll get additional housing numbers this week and personal income and spending numbers for January that should also shed some light on the state of the consumer. 



Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar


calendar icon Top 5 Events for the Week

MAR 25 - 29, 2019

1.   Fed Speak – All Week
2.   Brexit Vote –Tuesday
3.   January Personal Income & Spending – Friday
4.   February Housing Activity —Tues./Thurs.
5.   January Trade Balance — Wednesday



1.  Fed Speak—All Week

After last week’s uber-dovish FOMC meeting one could be excused for looking at a roster of eleven Fed speakers this week as a bit of overkill. The thinking would have been what could have changed from last Wednesday to this week to alter their outlook? Well, with the bond market rally and curve inversions that followed weak German and French manufacturing numbers from Friday—that pointed to deep contractions in those sectors for both countries—the Fed speak does take on added importance. Perhaps the most consequential of speakers will be Vice Chair Richard Clarida in Paris on Thursday. He’ll be in the eye-of-the-storm, so to speak, so his comments and observations may be the most salient as we try to assess any further change in Fed thinking.  Part of the Fed’s extreme dovishness last Wednesday was a realization of the asymmetric risk profile they face. Sitting only 250bps from the zero lower bound, the Fed isn’t exactly carrying a lot of antidote for a domestic slowdown that might be triggered by a further weakening in global  growth. With the European numbers from Friday that fear has been turned up a bit. 


10 year 3 month Yield Spread and Fed Eases


2.  Brexit —Tuesday

We’ll avoid talking about the continued lack of a U.S./China trade deal and move right into the other major geo-political storm: Brexit. Prime Minister Theresa May won a delay from the E.U. to continue and get some type of Brexit plan passed by Parliament. She is reportedly going to try for a third time to get her twice-failed plan passed tomorrow and if that fails again, the E.U. will give the House of Commons until April 12 to develop an alternative plan. If that happens they then would have until May 22 to have that new plan adopted by Parliament. The deadline dates are keyed off coming E.U. parliamentary votes in May. Whether the U.K. takes part in those votes obviously hinges on the Brexit vote outcome. In any event,  the issue still appears a long way from being settled and that uncertainty will be a basis for periodic flight-to-safety trade into Treasuries.


3.  January Personal Income & Spending –Friday

With the economy two-thirds consumer consumption the personal income and spending numbers are always key tells on the financial health and spending patterns of the consumer. The Fed made note in Wednesday’s statement of the recent weakening in consumer spending and that was a key component to the extremely dovish shift they undertook. For January, personal spending is expected to have rebounded by 0.3% versus December’s dismal –0.5% contraction. Spending adjusted for inflation (real spending) is expected to be nearly the same at 0.3% versus –0.6% the prior month. Personal income is also expected to rebound by 0.3% versus December’s –0.1% contraction. Spending adjusted for inflation (real spending) is expected to be nearly the same at 0.3% versus –0.6% the prior month. Price inflation, as measured by the PCE, is expected to remain modest with overall PCE at 1.4% YoY and core PCE at 1.9% YoY. 


4.  February Housing Activity—Tuesday/Thursday

Friday’s Existing Home Sales Report for February got lost in the blizzard of the bond rally and stock selling but it was a stellar report posting the strongest sales numbers in a year.  We have postulated recently that with the drop in mortgage rates, slowing in price appreciation, and wage gains that the increasing affordability could be a springboard to better housing activity. This week we  get  to test that thesis more. February Housing Starts are due tomorrow while the S&P CaseShiller Home Price Index for January is also due. It’s expected to show a continued slowing in annual price appreciation from 4.19% to 3.85%. Finally, Pending Home Sales for February—perhaps the most current as they are based on contract signings—are due on Thursday. If they all align and point to a rebound it may give the Fed some confidence to remain patient and on hold.


5. January Trade Balance —Wednesday

Despite tariffs, and the threat of tariffs, the trade (goods and services) deficit has widened under the influence of a stronger U.S. economy versus the world and dollar strength that has kept exports expensive and imports cheap over the last year. A wider deficit subtracts from GDP and is another reason to expect a slowing growth trend this year.  For January, the deficit is expected to narrow slightly to  -$57.0 billion versus -$59.8 billion in December. Over the past year the deficit has averaged -$48.98 billion so it’s obvious relative economic performance and dollar strength overrides the positive impact, if any, from trade deals and tariffs.





arrow up icon Investment Yield Ranges Over Last Year


US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg





Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research




Download / Print as a PDF