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A weak week signals equity markets' dislike for US trade taxes

| Posted by: Paul Donovan | Tags: Paul Donovan

  • Equity markets had a bad day on Thursday. The fear of additional US trade taxes is really not being well received, and investors seem to see the risk as rising. Otherwise, economic data was generally pretty good. Today's US employment report is more likely to show firms struggling to find people to hire, than a lack of jobs available.
  • Fears that a yield curve inversion signals a forthcoming recession are just wrong. Countless inversions have never generated a recession (UK, Germany, Japan, etc.). The average post-war US cycle lasts less than seven years. The law of averages means that anything stands a reasonable chance of predicting a downturn two or three years out.
  • Bond yields used to be dominated by inflation, and inflation used to be very strongly tied to the economic cycle, so "economy down = inflation down = bond yields down" sort of worked. US bonds today are not dominated by inflation. Inflation is not strongly tied to the economic cycle.
  • Eurozone third-quarter GDP is a revised number and therefore relatively unexciting. When adjusted for population growth, European growth rates have tended to match those of the US in recent years.