Vanguard economic and market update

July 9, 2019


Vanguard's key takeaways for clients:

  • There's a 40% chance of recession in the next 12–18 months.
  • The yield curve inversion grows more troubling the longer it persists.
  • The Federal Reserve will cut rates twice in 2019.
  • Central bankers may have difficulty achieving their 2% annual inflation target.


Read this interview with Senior Economists Alexis Gray and Andrew Patterson

Monetary policy

Vanguard believes that the Fed may have lost a window of opportunity for an "insurance" cut as a way to get ahead of what markets had already priced in.

  • Our view is that a preemptive insurance cut would have helped the Fed combat the persistent inversion of the U.S. Treasury yield curve, which can signal a recession.
  • Vanguard still believes the Fed will cut rates twice in 2019.
  • The European Central Bank (ECB), meanwhile, provided guidance on June 6 that it would keep rates at current levels through the first half of 2020, in line with Vanguard’s expectations. But ECB President Mario Draghi noted that rate cuts were debated and that there was “considerable headroom” for quantitative easing.
  • The Reserve Bank of Australia on June 4 lowered its cash rate to a record low 1.25%.

Economic growth

Vanguard on June 10 cut its outlook for U.S. economic growth to 1.7% by year's end, below our full-year call for 2.0% growth, a view that considers U.S.-China trade tensions and uncertainty from other bilateral trade negotiations.

  • Vanguard sees China's 2019 GDP growth at a below-trend 6.2%, with risks on the downside owing to weakness in the private sector and trade disputes.


Vanguard has increased from 30% to 40% the likelihood of a U.S. recession in the next 12 to 18 months. But it's not yet our base case for 2020 because Fed policy hasn't become fully restrictive.

  • Vanguard remains concerned about what an inverted yield curve is telling us. The inversion of the spread between the 3-month Treasury bill and the 10-year Treasury note grew even stronger after the Fed announcement. That is, yields of shorter-term debt continued to be higher than yields of longer-term debt. The inverted yield curve is sending a strong recessionary signal, as is declining investment in the U.S. housing sector.
  • The deeper this inversion goes and/or the longer it lasts, the higher the probability of a recession.


The U.S.-China trade dispute is back in the spotlight now that the threat of U.S. tariffs on imports from Mexico has been removed. A prolonged impasse or permanent tariff regime seems increasingly likely, and all eyes were on the G-20 meeting in late June in Japan between Presidents Donald Trump and Xi Jinping.

  • Hurdles remain to passage of the U.S.-Mexico- Canada Agreement before Congress recesses in August.
  • Vanguard believes the agreement is highly likely to pass before the end of 2020, albeit with the potential to spark volatility along the way.
  • A decision on threatened U.S. tariffs on autos imported from the European Union and Japan has been delayed until November 13.

U.S. jobs

The weakest U.S. job-creation report in three months brought the three-month moving average of new jobs to 151,000 in May, a slowdown in hiring that Vanguard has expected for some time.

Chinese yuan

China’s currency hit its weakest level of 2019 against the U.S. dollar recently, near a 7.0 level that has become symbolic in the context of U.S.-China trade.

  • Vanguard believes the yuan will continue to experience downward pressure, or modest depreciation, in the near term. But we expect that the People's Bank of China (PBoC), China's central bank, will protect the yuan against any substantial exchange rate movements.
  • The PBoC is aiming to balance the risks of a modest depreciation, which can increase the competitiveness of Chinese exports and offset the effects of tariffs, with further sharp depreciation that could trigger large-scale capital outflows.


Central bankers in many developed nations have set 2% as an annual inflation target.

  • We expect Moore's law, which sets out the relationship between technological advances and prices, to remain an obstacle to central bankers’ achieving that goal.


Anyone seeking Brexit clarity from U.K. Prime Minister Theresa May's decision to resign should instead embrace the virtue of patience. The Conservative Party is unlikely to elect a new leader, who would replace May as prime minister, before mid-July, just before the U.K. Parliament goes on recess for the summer.

  • Over the next several weeks, we should expect lots of noise, few answers, and the potential for market volatility.
  • The United Kingdom's deadline to exit the European Union is October 31, 2019, though this could be extended.
  • A Vanguard Investment Strategy Group research paper on the topic, It's not EU, it's me: Estimating the impact of Brexit on the U.K. economy, will soon be released.

Download a client-approved pdf of this web article. pdf


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Past performance is not a guarantee of future results.


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