The U.S. economy continued to perform reasonably well in the third quarter, with several September data points surpassing expectations. That said, global growth continued to languish, especially in manufacturing where trade wars have taken a toll. Inflation also remained stubbornly low. Against that backdrop, the U.S. dollar was a star performer, up 3.4% versus a basket of trade partner currencies and up 4.3% vs. the beleaguered euro. U.S. fixed income also posted another solid quarter, with the Bloomberg Barclays US Aggregate Bond Index up 2.3%. The S&P 500 Index eked out a modest gain of 1.7% and the MSCI ACWI ex USA lost 1.8%. The worst-performing sector was emerging market equity, which lost over 4%.

GDP across the 19-country euro zone grew 1.2% (annualized) in the second quarter, but its largest country, Germany, is now widely thought to be in recession; its second quarter GDP contracted modestly from the previous quarter. The ECB has lowered its forecast to 1.1% in 2019 and 1.2% in 2020. Japan revised its second quarter GDP down from 1.8% to 1.3% (annualized). In China, industrial output growth was an annualized 4.4% in August, its lowest monthly gain in 17 years. Euro zone PMI, a measure of manufacturing health, fell to 45.6, the lowest in 17 years. Germany saw its manufacturing data decline to the worst level in more than 10 years. Gyrations in trade talks continued throughout the third quarter. While the U.S. and China imposed and threatened tariffs on one another, the countries agreed to a 13th round of trade talks in October, thus easing concerns somewhat going into quarter-end.

In an effort to spur growth, central banks around the world in both developed and emerging markets cut rates in the third quarter. The ECB reduced its deposit rate from -0.4% to -0.5% and announced a new bond purchase program at a rate of €20 billion a month, beginning in November. Australia and New Zealand cut their benchmark interest rates to record lows of 0.75% and 1.0%, respectively. And negative-yielding debt ended the quarter at roughly $17 trillion, leaving investors to grapple with the dire implications of paltry yields and reduced return expectations for both stocks and bonds.

Against this rather gloomy backdrop, the U.S. economy continued to hum along in the third quarter. The consumer continued to be a bright spot, bolstering services sectors, while manufacturing dampened growth (the trend continued as the fourth quarter started, with disappointing manufacturing data released Oct. 1). Unemployment remains low (3.7%) and average hourly earnings ticked up (3.2% year over year). The Citi Economic Surprise Index was up sharply in August, surpassing expectations. Consumer confidence remains elevated, though the expectations component ticked down in September. GDP growth in the U.S. was 2.0% for the second quarter (annualized) and 2.3% year over year. Current estimates from the Atlanta and the New York Fed for third quarter GDP growth are just over 2.0%.

But worries over the impact of tariffs and concerns about growth overseas have led to rate cuts in the U.S. as well. The Federal Open Market Committee cut the Fed Funds rate by 25 basis points at its September meeting, bringing the range to 1.75%-2.00%. Commentary around the rate cut cited it as being a “mid-cycle adjustment,” but Fed Chair Jerome Powell also recently said that it is his objective to “sustain the expansion.” It is notable that two members voted against a cut and one voted for a 50 bps cut. The broad Fed view does not show another cut until after 2020, but expectations are mixed among the members. Market expectations are more dovish.

Headline CPI in August was 1.7% (Core: 2.4%) and the Fed’s favored indicator, the Core PCE Index, was 1.8% (annualized), below its 2% target. Monetary stimulus has not been able to spur inflation or growth, and thus talks of potential fiscal stimulus packages are beginning to surface in the U.S. and abroad. While this may be politically attractive, it should be noted that the U.S. federal budget deficit hit over $1 trillion for the first 11 months of fiscal year 2019, the highest in seven years, and roughly 5% of GDP. This has not posed a problem in recent years given sufficient overseas buyers of U.S. Treasuries, but it is an important data point to acknowledge.

Economic data along with striking political headlines in the U.S., Brexit uncertainty, Iran/Saudi tensions, civil unrest in Hong Kong, and ongoing trade talks leave much room for uncertainty in the fourth quarter.