Could Euphoric Sentiment Lead to a Bubble?
The U.S., Canada and Mexico finally reached a deal for NAFTA while the 10-year treasury signals growth in the future. But while euphoric sentiment spreads, what are the odds of a bubble forming? Get the details by reading on…
10-Year U.S. Treasury Surges, Signaling Growth Expectations – the yield on the 10-year U.S. Treasury climbed this week, to reach its highest level since July 2011. In our view, the rising 10-year rate is a barometer for higher growth and inflation expectations. In short, the market seems to be comfortably pricing-in future growth and believes the economy should continue chugging along. Recent economic data supports this sentiment, in our view. Labor markets remain tight but not overly hot, and manufacturing and service activity remains expansionary. Meanwhile, trade tensions between the US, Canada, and Mexico appear to have softened considerably with the tentative agreement on the USMCA trade deal, an indication that the trade wars worst consequences may be avoided entirely. As fear has subsided yields have gone up.1
Fed Chairman Conveys Unbridled Optimism – at the annual meeting of the National Association for Business Economics, Federal Reserve Chairman Jerome Powell made some comments that on the surface struck us as somewhat unusual, given the unbridled optimism he seemed to be insinuating. In his own words, Mr. Powell said that the United States is experiencing “a remarkably positive set of economic circumstances,” adding that “there’s no reason to think this cycle can’t continue for quite some time, effectively indefinitely.” Indefinitely?? Such language raises a few eyebrows around here, in the sense that the more euphoric sentiment spreads across the U.S. investor base, the higher the probability of a bubble forming. It’s on our radar. Mr. Powell did note, however, that the Fed plans to continue raising rates gradually while expressing concern that this administration’s fiscal policy of tax cuts and increased spending could adversely impact the government’s ability to respond to a future crisis.2
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A New Trade Deal: The USMCA – in a break from ongoing disputes and mudslinging, the US, Canada, and Mexico reached a deal for revising the 24-year-old NAFTA. There is not a great deal of economic breakthroughs that should result from the deal, and in fact most of the original deal’s features remain intact. Some notable adjustments, however, are that there are new rules requiring auto makers to build a greater portion of a car in North America, with a floor on wages to stem movement of labor (mostly into Mexico). To the extent that supply chains are altered as a result, consumers could see higher auto prices down the road. The new USMCA deal also scored some wins for the agriculture sector, with a provision to alter Canada’s sophisticated dairy rules and incentivizing all three countries to remove tariffs on pork, cheese, and other foodstuffs. A note to readers, however, is that the USMCA is not set in stone – it must still be ratified by Congress next year.4
Wages on the Move? – Amazon made waves in the news cycle this week when they announced raising the minimum wage for U.S. employees to $15 an hour as of November 1, a boost that will cover more than 250,0000 current employees and also include the incoming 100,000+ holiday workers. The impact of the move is unclear, insofar as whether it will nudge the hand of other mega-cap retail and consumer corporations to do the same. As far as Amazon is concerned, it does not appear to be a dramatic move, since the company has previously indicated that it was already paying effective wages of $15+ an hour when including bonuses and stock options. The kicker to this story might actually be that in exchange for raising the minimum wage, Amazon is now eliminating those incentive payments.5
While watching news stories can help you stay abreast to data that tells you about the state of the economy, proper financial planning also requires knowledge of investments, cash flow needs, saving strategies, and more down the line. This may sound like a lot to manage, but you don’t have to do it alone.
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2 The Wall Street Journal, October 3, 2018, https://www.wsj.com/articles/fed-chair-powell-sees-remarkably-positive-set-of-economic-circumstances-1538600083?mod=djem10point
3 ZIM may amend or rescind the Guide “Guide to Personal Wealth Management” for any reason and at ZIM’s discretion.
4 The Wall Street Journal, October 2, 2018, https://www.wsj.com/graphics/nafta-trade-industries/
5 The Wall Street Journal, October 3, 2018, https://www.wsj.com/articles/amazons-wage-increase-adds-pressure-for-employers-to-boost-pay-1538518368
6 These rankings may not be representative of any one client’s experience. In addition, they are not indicative of future performance
7ZIM may amend or rescind the Guide “Guide to Personal Wealth Management” for any reason and at ZIM’s discretion.
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