Displaying items by tag: yields

(New York)

Ever since the stock market’s then peak in January 2018, bonds and stock have had a very close relationship. Equities have been tracking the performance of the investment grade bond sector. When yields rose late last year, stocks plummeted. The opposite is happening this year, and in that change lays a predicament for shares. Yields have fallen so deeply this year, and equity prices risen so high, that it appears unlikely stocks can rise much further as the benefits of lower rates have already been fully priced in.

FINSUM: While we are generally incredulous of these types of arguments, we cannot help but feel a confluence of circumstances (an earnings recession not the least of them) are coming together in such a way that equities seem likely to have a correction.

(New York)

Gold just took the jobs report on the chin. As our readers will know, the US jobs report from Friday was nothing short of stellar, with the job creation numbers blowing away all expectations, and in doing so, lowering the odds and potential pace of Fed rate cuts. That led to a big sell-off in gold on Friday that followed an even larger one Monday. Gold lost almost 4% over just two days last week.

FINSUM: The jobs report simultaneously sapped gold of the fear boost it gets from worries about the economy, as well as the potential benefit of lower rates.

(New York)

The yield curve inversion has largely faded from headlines. Things that become the status quo often do! But in that development lays a hidden but worrying truth—the longer the yield curve is inverted, the more likely it is that there will be a recession. The inversion has been in place for over a month now and it is actually getting worse, with long-term yields continuing to drop. A yield curve inversion has proceeded every US recession in the last 50 years.

FINSUM: If the Fed proceeds with cuts, it seems like the inversion may abate. But then again, the rate cut would be an implicit admission that we are on the way to a recession.

(Washington)

It is no secret that Trump is a critic of the current Federal Reserve. He has frequently complained about Powell and wishes the Fed would take a more dovish stance. Well, he took a step towards making that dovish position a reality this week as he has just appointed two notable doves to the Fed. One is Judy Shelton, an economic adviser to his 2016 campaign, who will now be on the Fed’s board. The other is Christopher Waller, who will be the head of research at the St. Louis Fed. Shelton has numerous times expressed extremely dovish views and has said she does not like the Fed’s way of setting rates and would instead prefer a market-set rate.

FINSUM: Shelton’s views are pretty revolutionary, so it seems like she could really shake things up.

(Washington)

The market has the idea that the Fed holds a massive “put”. The concept entails that the Fed can effectively set a floor on asset prices because it can take dovish action to support markets at any point. However, that notion is problematic at the moment because a rate cut in the near term may actually induce a correction. In fact, markets look set for a lose-lose scenario. On the one hand, if the Fed does not cut rates, markets will be very disappointed and slump. On the other hand, investors have already priced in a near 100% chance of a rate hike, so it happening won’t give markets much of a boost and is more likely just to make investors worry that the economy is headed south.

FINSUM: We hate to say it, but we kind of buy into this view. Maybe not so much that markets will fall even if the Fed cuts rates, but the cuts certainly won’t be overly supportive at this point and may lead to a gradual decline.