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June 07, 2019

Rate Fate

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Rate fate.  Stocks climbed for a third straight session as rumors emerged that the Administration would delay the onset of Mexican tariffs.  Investors continue to ponder rate cuts in the wake of dovish-ish comments by the Fed and they feel emboldened.

 

MY TWO CENTS

 

  1.  It’s not just the stock market that appears to be emboldened by suggestions of rate cuts.  Despite the Bloomberg report in the afternoon session that powered the markets into a positive close, the saber rattling continued.  First, the White House Press Secretary announced that there was no plan to delay the tariffs then, WHILE YOU SLEPT, both the Vice President and the President took to the airways to comment.  VP Pence announced that the 5% tariff would go in effect on Monday as planned and then went on to explain that “They [Mexico] need us, we don’t need them”.  While many are saying that a deal with China is doable but not easy, President Trump suggested that he will “definitely get a deal” with China.  Now, on to rates.  The President has long been calling on the Fed to cut rates to counter any bad side-effects from the ongoing tariff tangles and has bristled at their reticence to do so, citing the PBOC (Chinese Fed) which has been easing monetary policy to coordinate with the government.  In fact, WHILE YOU SLEPT, PBOC head Yi Gang said that the bank has “plenty of room” in interest rates and other stimulus options to tackle the effects of the trade war.  Fed Chairman Powell’s soft language from earlier this week has surely given the Administration the wink they sought and most likely caused them to toughen their stance in negotiations.  The Fed will meet on Jun 19th and 20th to discuss rates and the Wall Street Journal has reported that the body will already consider a rate cut at that meeting.  There is now a 97% chance of two 25 basis point rate cuts by December.

 

  1.  The yield curve says “look out below”. My regular readers know of my obsession with the yield curve, but its not just me.  Its historical success of predicting economic downturns cannot be disputed and the longer the curve remains inverted the more accurate it becomes as a predictor.  In the vagrant financial markets the only thing that is certain is the fact that nothing is certain (take a second to think about that).  However the 3-month/10-year yield curve closed inverted for a 10th straight day and history shows us that the GDP has contracted within 311 days on Average following a 10 day inversion (according to Bianco Research).  Yesterday, New York Fed President John Williams said that an inverted yield curve sends a “pretty strong signal”.  The Fed is taking notice, so should we.

 

THE MARKETS

 

Stocks rallied on hopes that the border dispute tariffs on Mexico might be avoided.  The S&P500 climbed by +0.61%, the Dow Jones Industrial Average traded up by +0.71%, the Russell 2000 slipped by -0.22% (small caps are less reliant on international trade), and the NASDAQ 100 rose by +0.76%.  Crude Oil got a +1.76% bump up after falling on Wednesday.  Gold continues to glimmer with a +0.38% pop in yesterday’s session.  The rise in gold has been largely driven by the weakening dollar which has been falling as probabilities of rate cut increases and treasury yields have been sinking.  Bonds were virtually unchanged yesterday and 10-year treasury yields fell by -2 basis points to 2.11%.  The 3-month/10-year yield curve remained inverted for the 10th straight session at -19 basis points.

 

WHAT’S NXT

 

- The Bureau of Labor Statistics will release its monthly employment situation.  Non-farm payrolls are expected to have increased by +175k down from last month’s +263k growth.  The Unemployment rate is expected to stay steady at 3.6%, still at 50 year lows.  Average Hourly Earnings are expected to have  growth by +0.3% month-over-month compared to last months +0.2% growth.  The non-farm payrolls number will be watched closely in the wake of an unexpectedly low ADP number from earlier in the week.

 

- Baker-Hughes US Rig count is expected to show 982 active rigs compared to last week’s 984.

 

- San Francisco Fed President Mary Daly speaks today.

 

- Next week will feature JOLTS, PPI, CPI, Retail Sales, Industrial Production, and University of Michigan preliminary Sentiment.

 

 

Have great weekend!

daily chartbook 2019-06-07