The week ahead could be a doozy. On Friday, Special Counsel Robert Mueller III submitted his long-awaited report on Russian interference in the 2016 U.S. Presidential election. Mueller sent the report directly to Attorney General William Barr, who will now decide how much, if any, of the report to release to Congress and the American public.
Over the weekend, Barr reviewed Mueller’s report and communicated to members of Congress his primary findings: that there appeared to be no collusion between Trump, his campaign and Russia and that no conclusion was reached on whether Trump obstructed justice or not. The report, which was nearly two years in the making at a cost of over $25 million, is already being hotly debated. It is important to consider that Mueller made note in the report of the fact that while it did not show any crimes committed, it did not fully exonerate the President either. Democrats have certainly taken notice of this and other issues with the report and its rapid release by Barr, and a further showdown could be in store as Democrats call Barr or even Mueller to testify.
Markets are also grappling with an inverted yield curve, and investors sold stocks aggressively late last week as recession fears fueled risk aversion. The yield curve inverted for the first time since 2007 on Friday, and such a condition is considered a reliable recession indicator.
The yield curve inversion comes on the heels of another dovish Federal Reserve meeting. The central bank has now essentially removed any expectations for further rate hikes this year and has lowered its expectations for growth. The Fed clearly sees some substantial risks to the economy and the bond market is sending a signal that should not be overlooked.
Making the yield curve inversion even more concerning is the current state of monetary policy. Although the Fed had set out to “normalize” monetary policy and has been hiking the Fed Funds rate since 2015, current rates only stand at 2.25%-2.50%. Prior to the Great Recession of 2008/2009, the Fed Funds rate had been at 5.25%-5.50%. The central bank has considerably less room to work with this time around and may not be able to create the desired shock-and-awe effect of rapid rate decreases. The Fed’s balance sheet is also still full of assets, having peaked at about $4.5 trillion and currently sitting around $3.9 trillion. The central bank may be very reluctant to start up the printing presses again with QE4 given the already-swollen size of its balance sheet.
Adding to investor anxiety over the rising risk of recession is a recent lack of progress in U.S./China trade talks. Although recent rounds of talks between trade officials had been considered positive, they have still not led to a sit-down between President Trump and Chinese Leader Xi Jinping. A formal meeting may need to take place before the June G20 meeting in order to keep recent momentum going. With the Mueller investigation out of the way-at least for now-President Trump may find himself in a stronger position and China may have more incentive to reach a long-term agreement.