Displaying items by tag: fed

(New York)

As we have told readers, we have been keeping our antennae up for signs that an economic downturn may be on its way. Well, the biggest one of all just showed its head, and investors need to take notice. An important part of the rates market just showed an inverted yield curve. The one-month U.S. overnight indexed swap rate is now inverted, and this implies some expectation of a lower Fed policy rate after the first quarter of 2020, says JP Morgan. The Bank summarizes the situation this way, saying “An inversion at the front end of the U.S. curve is a significant market development, not least because it occurs rather rarely … It is also generally perceived as a bad omen for risky markets”.

FINSUM: If the market thinks rates are going to be lower in 2020, that means parts of the bond market are expecting a recession between now and then. Take notice.

(Washington)

This morning the US released a jobs report that was expected to be very strong, with unemployment maybe falling under 4%. However, the opposite happened, and we have a definitively weak report on our hands. The economy only created 103,000 jobs versus expectations of 178,000 and unemployment held steady at 4.1% rather than falling to 4%. The Labor Department also revised previous months downward, worsening the overall picture.

FINSUM: This is an interest result and one that seems more likely to keep the Fed leaning towards dovishness. We would say this is clearly bullish for bonds, and a little bearish for stocks.

(New York)

The bond market is in flux. It is caught between several strong opposing forces. On the one hand, the Fed looks intent to raise rates. On the other, many are worried about a recession. Finally, the huge and increasing crop of retirees need reliable income. With that in mind, here are some potentially good bond buys from Pimco. The fund manager doesn’t think we will have a recession soon, saying “We think the [economic] cycle will continue for the next couple of years, but stocks aren’t cheap and bonds aren’t cheap”. Pimco suggests looking at high quality junk bonds, and the short end of the Treasury yield curve (e.g. 2-years, which are yielding over 2%).

FINSUM: High quality junk is still yielding over 5%, while the short-end of Treasuries also looks appealing. We don’t think there is a reason to flood out of bonds yet.

(Washington)

Investors get ready, because it looks like the next recession is on the horizon and the Fed is set to start it. And we are not talking about a distant horizon. The Fed has now made its goal a task that has been nearly impossible historically. That is to boost the unemployment rate without causing a recession. The odds of failure are very high and the Fed has never successfully achieved it in its history. The reason the Fed wants to boost unemployment is that labor markets are very tight, which will produce unacceptably high inflation. Accordingly the Fed must intentionally walk up the unemployment rate to keep things in check. The tool it will use is gradual rate rises to slow down growth and boost unemployment.

FINSUM: We think the Fed is probably going to fail in this exercise, either by being too dovish and letting inflation get too high, or by being overly hawkish. Either way we do not see a good outcome. This cycle might have just crested.

(New York)

Bonds have stopped their losses and there is a clear reason why—the market does not believe that the Fed is going to be as hawkish as many feared. The Fed’s January minutes were not as aggressive on raising rates as many suspected, and now bond traders are afraid that inflation may run quite hot without the Fed doing anything about it. Therefore, there is upward pressure on yields, but that force is being contained by the fact that rates are unlikely to be hiked aggressively. The current consensus, based on Fed comments, is that inflation could run to 2.5% before the central bank would become concerned.

FINSUM: The economy is doing quite well at the moment and the Fed doesn’t want to disrupt that by hiking too early.