Browsing articles in "Weekly Market Update"

Yield Curve Hysteria

Aug 16, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

I’m not going to lie.  It was a rough week for the markets.  A bit of panic took hold as investors rushed into “safe” investments such as U.S. Treasuries, pushing interest rates lower than they have been in a long time.  Some parts of the yield curve “inverted” while the long-end went below 2% for the first time ever.  These are not normal times and the market is overreacting in fast and impulsive ways.  The 800-pt drop in the Dow Jones Industrial Average was an aberration sparked by fear and perpetuated by the media.

Note: A yield curve inversion is simply when short-term bonds have higher yields than do longer-dated bonds.  It is normal to see an upward sloping yield curve indicating that the further out the maturity, the higher the rate of return.  You see this in CD rates as well.  The metric that most analysts look at is the 2yr and 10yr Treasuries.  At the moment, a 2yr treasury is yielding around 1.47%.  Those looking to buy a 10yr treasury will receive about the same.  In a nutshell, investors aren’t being rewarded for the additional risk of buying a bond with a maturity farther out into the future.

To be fair, protracted uncertainty on trade is having some impact on business sentiment.  However, the U.S. economy is holding up well, and now stands to benefit from a more dovish Federal Reserve.  China has shown a bit of weakness, but not a sharp slowdown.  The weakness in Europe is more pronounced, notably in Germany as we’ve seen with recent gross domestic product data, but by no means a collapse.

The US economy continues to create jobs at a robust clip, even with the unemployment rate already at a 50-year low. Tightness in the labor market is beginning to show up in higher wages, which coupled with low inflation, allows for more disposable income for consumers.  Household consumption powers the economy, and the household saving rate as of June this year is at a very healthy 8.1%.

In short: the economic data shows no evidence that the United States is approaching a recession.  The markets and the Fed seem to be looking at each other, feeding each other’s fears, and completely ignoring what’s going on in the real economy.

Part of the hysteria is that when the yield curve inverts, it has been followed by a recession.  You’re probably thinking, but he said there’s nothing to worry about?  Well, yes and no.  The piece of data that isn’t widely reported is that it typically takes anywhere from twelve to eighteen months for the recession to happen.  I don’t have a crystal ball, but the probability of a recession happening soon is very slim.  Economists put a 30% chance of a recession happening in the next twelve months.  In all likelihood, if we have a recession, it won’t occur until sometime in 2021.

In closing, let me throw one more curveball your way.  An inverted yield curve is one thing, but what about negative interest rates?  Think it can’t happen?  It is already happening in a number of developed countries around the world including Germany, France, Belgium, Switzerland, and Japan.  While not discussed much, I believe these negative interest rates abroad are helping to drive foreign investors, institutions, pensions, and banks to buy U.S. treasuries, thereby further pushing rates lower.  However, this week I came across another story that really did leave me scratching my head.  A Danish bank has started offering mortgages with a negative interest rate.  Denmark’s Jyske Bank is now offering a 10-year fixed-rate mortgage at negative 0.50%.  Additionally, Finland-based Nordea Bank announced it will offer a 20-year fixed-rate mortgage in Denmark that charges no interest and is looking to extend that to the traditional 30-year mortgage.  To be clear, with a negative interest rate, the borrow ends up paying back less than the amount they borrowed.  While I can’t see that happening in the United States, it is something to ponder as you look at your mortgage statement.  Now you know.

August 16, 2019

China Jabs Back

Aug 9, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

This week was not for the faint of heart.  Accusations of currency manipulation, further interest rate cuts, and more saber-rattling created unease among investors.  Earnings season is still in full-swing, although you wouldn’t know it by the headline news dominated by geopolitical issues.  There are times when company fundamentals matter more than others.  Now is not one of those times.  While still important, the current environment is more consumed with tweets, threats, and forecasts.  The difficulty with the current environment is that it is not terribly predictable nor is it completely logical.  As with most periods of uncertainty, this too shall pass.  It is just a matter of time.

Given the latest trade threat from the United States, it was expected that China would retaliate.  One would assume they’d impose a tit-for-tat type of tariff on U.S. goods.  The surprise was that they did no such thing.  Instead, the Chinese government allowed the Yuan to fall against the U.S. dollar to its lowest level ever, and strengthen the U.S. dollar in the process.  President Trump has recently gone on record against the long-held belief that a stronger U.S. dollar is good for the United States, but instead stating that it is in large part the cause of the current trade imbalance.  Making matters worse, the Chinese government went one step further suspending all U.S. agricultural purchases.  China is one of the largest purchasers of U.S. agriculture.  This escalation is taking our relationship with China into uncharted waters.

So, what started as a “simple” trade war has progressed into a what some are calling a currency war.  The U.S. Treasury officially added China to the list of currency manipulators and will bring a case before the International Monetary Fund (IMF).  China will undoubtedly have some justification for allowing the devaluation of its currency, however the charge is mostly symbolic.  Despite calling China a currency manipulator, there is really no consequence for the action.  It will probably not be the last time China surprises us with an unexpected means of retaliation.  Some others might include dumping U.S. Treasuries (China owns $1.11 trillion) or hitting the U.S. energy sector by banning importation of U.S. oil and natural gas.  What may have seemed like a simple and appropriate negotiating tactic at first blush is a lot more complicated than one might imagine.  There is nothing straightforward about dealing with an economic superpower.

In company news, it seems Fifth Third Bank is making headlines with an announcement to raise it’s starting wage to $18 per hour.  This goes well beyond the $15 per hour minimum wage many are pushing for and suggests the tight labor market may be starting to drive up wages.  It will be interesting to see if other banks follow suit.  We also learned this week that Beyond Meat is not the only player in town.  Privately held Impossible Foods is rolling out it’s Impossible Burger at all Burger King locations across the country.  Also, it is working on a plant-based fish substitute as part of an ambitious mission to create replacements for all animal-based foods by 2035.

In closing, I want to share a study I came across this week that may just change your life.  We’ve all occasionally experienced tossing and turning and a general inability to fall asleep.  Well, according to a new long-term study, the key to a better night’s sleep may be to look on the bright side of life.  Researchers from the University of Illinois say the more optimistic a person is, the more likely they are to enjoy longer, more restful sleep.  Now you’re probably saying, “duh” of course I would sleep better if I wasn’t fretting over problems and worrying about issues small and large.  While the team isn’t exactly sure why a positive mindset leads to better sleep, they hypothesize that positivity likely alleviates the effects of stress.  Perhaps.  But maybe it’s the other way around?  Not having stress allows for better sleep?  Either way, try to alleviate stress, remain optimistic, and get a better night’s sleep.  Now you know.

August 9, 2019


Aug 2, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

So much news this week and so little space to write about it.  Where to start?  The Federal Reserve cut interest rates for the first time in ten years, trade talks with China deteriorate with new tariffs coming, mixed economic data galore, and a feeling that investor sentiment is being tested.  Let’s get started.

The big news this week, albeit not a surprise, was that the Federal Reserve decided to cut interest rates 0.25% for the first time in over ten years.  In “normal” times, this would have been followed by a large increase in the markets.  However, markets swung six-hundred points on the day to finish three-hundred points lower.  Turns out the message was more important than the act.  In this case, Jerome Powell, head of the Federal Reserve, laid out an ambiguous and confusing statement after the announcement that led many to believe the Fed isn’t going to pursue a change in policy after all, but instead this rate cut was a one-and-done event.  That was not pleasing to investors who want the wind of the Fed at their backs, and 98% of whom expect a second rate hike in September.  Before the market had time to digest the Fed’s statement, the other shoe fell.

After the Fed announced it was going to lower interest rates, the President took the opportunity to go on the offensive with China.  .  He tweeted that come September 1st, if no agreement is reached in the trade negotiations, the U.S. will impose an additional 10% tariff on $300 billion of good coming into the United States.  This sent the market reeling again with a few industries taking it especially hard, i.e. auto suppliers, semiconductor stocks, apparel & footwear companies, and the energy sector.  To be fair, the President has been patient in waiting for China to increase agriculture imports, namely soybeans, and to reduce the export of Fentanyl (a widely abused opioid).  China had agreed to these items in the last round of negotiations, but took no action to implement the agreement.

To add to the turmoil this week, the economic indicators did little to appease investors.  The takeaway is that consumers are strong but manufacturing is weakening.  Here’s a rundown of the economic indicators released this week.

  • Stronger-than-expected
    • July Consumer Confidence 135.7 vs 125.0 consensus
    • July Consumer Expectations 90.5 vs 90.3 consensus
    • July ADP jobs report 156K new jobs (more than 112K in June)
    • June Personal Income rose 0.40% vs 0.30% expected
  • In-line
    • July Nonfarm Payrolls 164K new jobs (but June was reduced by 31K)
  • Weaker-than-expected
    • Current Economic Conditions 110.7 vs 111.6 expected
    • Jobless Claims rose by 8K to 215K
    • July Dallas Fed manufacturing survey -6.3 vs -5.0 consensus
    • July ISM manufacturing index 51.2 vs 51.9 consensus
    • July Chicago PMI 44.4 vs 50.5 consensus (weakest level since 2015)
    • June factory orders rose 0.60% vs 0.80% estimate

Another piece of news that I found interesting this week is the question of where exactly the farm aid is going.  More than half of the $8.4 billion in trade aid payments to U.S. farmers through April was received by the top 10% of recipients, the country’s biggest and most successful farmers.  The top 1% of aid recipients received an average of more than $180K while the bottom 80% were paid less than $5K in aid.  Say what you will but it pays to be big.

In another interesting theme I read a lot about this week, we see artificial intelligence (AI) being used in new and innovative ways.  JPMorgan Chase signed a 5-year deal with Persado to use AI to create marketing and advertising copy.  The company saw click-through rates as high as 450% on ads using Persado AI vs. 50-200% for those crafted by people.  In another story, NASDAQ is testing AI to spot stock-market abuses.  It is testing an AI surveillance system to monitor its U.S. stock market and detect previously unknown methods of illegal equities trading, the Wall Street Journal reported.  And finally, I read Google had a major kidney breakthrough using DeepMind, which it acquired in 2014.  Its technology can predict if a patient has potentially fatal kidney injuries 48 hours before any symptoms can be recognized by doctors.  About 2 million people die every year from acute kidney injury, according to researchers from the University of Pittsburgh School of Medicine.  These are interesting new ways artificial intelligence is shaping the world.

Since this week’s article is longer than usual, I’ll keep my closing comments short.  UBS plans to levy a negative interest rate on wealthy clients who deposit more than $2 million with its Swiss bank, as lenders prepare for another round of lower interest rates.  While this won’t affect many, it is an interesting development about how banks treat deposits.  In a world of extraordinarily low interest rates, it seems banks no longer want your money.  While UBS isn’t an American bank, it does have operations around the world which includes branches in and around Cincinnati.  Let’s hope this idea doesn’t catch on.  Now you know.

August 2, 2019

Spending Our Way to Prosperity

Jul 26, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Earnings announcements dominated the news this week.  Well, that’s not exactly accurate.  Other things that dominated the news included the bipartisan agreement to increase the U.S. debt ceiling, and the Mueller testimony on Capitol Hill, but for the most part it was earnings announcements that moved the markets.  For the next few weeks, I expect that’s the majority of what we’ll be talking about.

I know I said earnings announcements are what is moving the markets, but the budget deal is the real story this week.  The White House and congressional Democrats reached a bipartisan deal to suspend the U.S. debt ceiling until the middle of 2021, and include parity in spending increases for defense and domestic programs.  The deal is likely to irritate nearly everyone on Capitol Hill.  Republicans generally resist debt limit increases and higher domestic spending without cuts, and Democrats will have to vote for raising defense spending to historic highs.  Some breathed a sigh of relief that a government shutdown was averted while others exclaimed this is the worst budget deal ever.  Either way, the elephant has left the room and the economy is free to grow with the help of further easy monetary policy.

In other news, you likely saw Robert Mueller testify this week regarding the findings of his two-year investigation into collusion and obstruction.  Like the debt ceiling news above, his testimony either pleased you greatly or sent you into apoplexy.  True to his word, he did not elaborate on any of his findings, but instead referred one congressman after another to the text of his report.  While I can’t say I’m happy about the spectacle these committees made of the hearings, I can say I’m pleased that it appears to be over.  Neither side “won” but both sides came out looking worse for wear.  But also like the debt ceiling news, with this chapter seemingly over, the country can move onto more pressing matters… the 2020 presidential election.  With impeachment all but off the table, it would appear that the economy has one less obstacle to clear.

And lastly, while we’re on the subject, Boris Johnson replaced Theresa May as the new Prime Minister of the United Kingdom this week.  You’ll remember that Theresa May had negotiated a Brexit deal with the European Union but failed to gain enough support in her own party to get it passed back home.  Boris Johnson won the election by a 2-1 margin and has the mandate of the conservative party.  You know the elephant that left the debt ceiling room?  Well, it’s now entered the Brexit room.  Mr. Johnson has vowed to lead Britain out of the EU with or without a deal by October 31, 2019.  I’d take him at his word.  The consequences of leaving the EU without a deal are not completely clear, other than to say issues of trade and travel will be front and center on November 1st.  There’s also the issue of the $41 billion “break-up fee” that the U.K. would owe the EU.  Mr. Johnson recently said, “Let’s take the money and put it in a state of creative ambiguity suspended over the negotiations until we get what we want.”  The next few months will be interesting to say the least.

Next week, we’ll talk a bit more about corporate earnings.  I promise.  However, to end this week I came across an interesting factoid that I just have to share.  We’re all familiar with Tic Tacs, right?  You know the small, hard candy-like mints that come in the cute transparent box.  Anyway, they are marketed as a sugar-free candy, but I discovered this week that they are not actually sugar free.  They do in fact contain sugar.  However, since the amount of sugar per serving (1 mint) is less than 0.5 grams, FDA labeling requirements permits the Nutrition Facts to state that there are 0 grams of sugar per serving.  The catch is “per serving.”  Who stops at just one little mint?  Now you know.

July 26, 2019


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