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By WSJ 3.25.19 • March 25, 2019

Brexit, GDP, yield curves, Fed speeches, trade talks.....

Danger Zone

Friday closed out with reports showing factory output in the eurozone fell in March at the fastest pace in six years and U.S. manufacturing activity slid to its lowest level in almost two years. The drumbeat of unsettling news drove the yield on 10-year Treasury notes below that of three-month bills for the first time since 2007. That situation, known as an “inverted” yield curve, has preceded every U.S. recession since 1975 and is viewed by many investors as a reliable predictor of downturns, Paul Kiernan reports.

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Soft Landing

The U.S., which releases a revised gross domestic product estimate Thursday, is of special concern to investors looking for signs a slowdown in global growth is worsening, Akane Otani and Joe Wallace report. The Bureau of Economic Analysis in February said U.S. GDP advanced at a 2.6% pace at the end of 2018. That seems optimistic now: Macroeconomic Advisers is tracking 2%, JPMorgan Chase is down to 1.8%. The WSJ consensus is 2.4%.

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To Raise or Not to Raise

Chicago Fed President Charles Evans said Monday he doesn’t expect an interest-rate increase in the U.S. until next year, probably in the second half. “It’s a good time to stop, pause, look and see how things are going to progress, and be cautious,” he said at an investment conference in Hong Kong. Mr. Evans is forecasting a relatively healthy 1.75% to 2% pace of growth this year. But there are caveats: "At the moment, the risks from the downside scenarios loom larger than those from the upside ones.” 

That is the Question

Philadelphia Fed President Patrick Harker said the central bank may yet raise rates this year. "My current view is that, at most, one rate hike this year, and one in 2020, is appropriate, and my stance will be guided by data as they come in and events as they unfold," he said Monday in London.

“I still see the outlook as positive, and the economy continues to grow in what is on pace to be the longest economic expansion in our history,” he added.

Small Reprieve

German business sentiment picked up in March following six straight months of decline. The Ifo Institute said Monday that its business climate index rose to 99.6 from a revised 98.7 in February, led by an improved outlook in the services sector. In manufacturing, the business climate weakened once again as the expectations component hit its lowest level since November 2012, Nina Adam reports.

Participation Trophy

The U.S. labor-force participation rate has defied predictions of demographic-driven declines thanks to a strong economy that is pulling in and retaining more workers. In just the past six months, the number of people outside the labor force has fallen by 1 million, the largest such decline on record, Nick Timiraos and Sarah Chaney report.

The rate’s trajectory from here will have big implications for a range of issues, including how fast the economy can grow, how much inflation it generates and whether the Fed will continue to feel comfortable keeping interest rates so low. With more people in the workforce than expected, the economy might be able to grow faster without pushing up inflation in a way that would warrant interest rate increases.

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The Moore the Merrier

President Trump said he would nominate former campaign adviser Stephen Moore to serve on the Fed’s board of governors. Confirmation of Mr. Moore, a commentator on CNN, would bring a more partisan political advocate to a Fed board typically populated by technocratic policy veterans. He has veered from criticizing the Fed’s easy-money policies under President Obama, to opposing the Fed’s moves to tighten policy after Mr. Trump’s election, Nick Timiraos reports. In recent months, Mr. Moore has echoed the president’s complaints about the Fed. “The Fed is a disaster,” Mr. Moore said in a Journal interview last December. “We should have a discussion in this country about whether we need a Fed.”

Red Sea

The U.S. economy is apparently slowing in the aftermath of massive fiscal stimulus. The U.S. budget gap widened 39% in the first five months of the fiscal year as tax revenues held steady and federal spending increased. Higher spending on health care, the military and tariff-assistance programs for farmers pushed the deficit to a record $234 billion in February, 9% higher than the same period a year earlier, Kate Davidson reports.

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