Displaying items by tag: fed

(New York)

The S&P 500 just recently emerged from its longest correction period in over 30 years. The big question is what will it do next. Well, there are a number of key issues/events that could either send it tumbling again, or push it higher. Three are easy to see on a timeline: this Friday’s jobs report, a Fed policy meeting, and another week of corporate earnings (140 companies in the S&P 500). There is also the looming trade war/tariff issue that could threaten the market, or support it, at any time.

FINSUM: Look out for the jobs report this Friday. There is going to be very high expectations, and if things don’t go as planned, the market could have a seriously adverse reaction.

(New York)

If you have been following the situation closely, you will have noticed that the Fed is pretty uniformly dismissing the risks of our almost-inverted yield curve. The central bank thinks that central bank bond buying has held long-term yields to artificially low levels, and accordingly, they think the only 30 bp spread between two- and ten-year Treasuries is of no concern. The problem is that this is almost the exact same logic the Fed used when the yield curve inverted in 2006. Then they said it was a global savings glut keeping long-term yields pinned. Soon after, the US went in to recession and the Crisis erupted.

FINSUM: A big part of the problem here is not just that higher rates could lead to a recession, but that low long-term yields drive investors into riskier investments (just as they did pre-Crisis), so the flat yield curve is actually very worrying. The Fed is sleeping walking into a bear trap.

(New York)

The rise in yields across the world has seemed to stall over the last couple of months. Ten-year Treasuries are back under 2.9%, and while the yield curve is flattening, the risk of big losses from rising long-term yields seems to be mitigated. Not so fast. The Wall Street Journal is reporting that many of the world’s central banks are now aligning themselves with the Fed and are preparing to begin lifting rates. The pattern is emerging across both the developed and emerging markets (e.g. the Bank of England and the Reserve Bank of India).

FINSUM: We think this could be a risk for US investors. The main reason why being that one of the things that has kept long-term yields low is demand from overseas investors for our relatively higher-yielding bonds. If that changes, there won’t be such a lid on Treasuries.

(Washington)

In a highly unusual break from presidential tradition, President Trump weighed in yesterday on the Fed’s current policy approach, and he was not happy. Speaking in regard to recent rate hikes and plans to continue doing so, Trump said “I’m not thrilled … Because we go up and every time you go up they want to raise rates again ... I am not happy about it. But at the same time I’m letting them do what they feel is best.” Speaking plainly, Trump continued “I’m just saying the same thing that I would have said as a private citizen … So somebody would say, ‘Oh, maybe you shouldn’t say that as president. I couldn’t care less what they say, because my views haven’t changed. I don’t like all of this work that we’re putting into the economy and then I see rates going up”.

FINSUM: The media is trying to make a very big deal out of this, but in our view, these are pretty benign comments, especially coming from Trump.

(New York)

Anybody who is worried about a pending bond bear market might take some solace in recent news. Bond markets are becoming increasingly skeptical of the Fed’s bullish stance on the economy, and traders believe there won’t be nearly as many rate hikes as the Fed says. The US has just seen a weak inflation report, and a flattening of the yield curve, both at home and in the Eurodollar market, spells ill for the economy. So while the Fed says it will continue to hike rates into 2020, top market analysts are saying things like “The markets are telling us that there is a pretty high risk of economic slowdown or recession at the end of 2019” (Janney Capital Management).

FINSUM: We think the economy will definitely start to weaken before 2020. Perhaps we will not have a deep recession, but we definitely don’t think there will be continuous hikes for the next year and a half, which is good news for bonds.