Mixed Signals

In a classic case of the tail wagging the dog, the bond market is signaling that the U.S. economy is headed for a recession, rather than the economy telling the bond market that news, which it doesn’t appear to be doing.

On Wednesday, yields on the benchmark 10-year Treasury note fell below two-year yields for the first time since 2007. “This kind of inversion between short and long-term yields is viewed by many as a strong signal that a recession is likely in the future,” according to the Wall Street Journal. Except, of course, when it doesn’t, and this just may be one of those times. The economy, albeit weaker than it was late last year and earlier this year, doesn’t seem to be close to a recession.

Actually, Treasury yields have been inverted for a while, depending on which spread you look at it. At the same time, yields along the curve have dropped sharply in recent weeks, with some securities dropping to record lows.

For example, on Thursday, the yield on the 30-year bond dropped below 2.0% for the first time ever. That’s down from 3.45% on Halloween. The 10-year yield plunged below 1.60%, down from 3.16% last October 1 and it's lowest level since it hit 1.46% three years ago in July.

Meanwhile, the price of gold has jumped 18% since May to more than $1520 an ounce, its highest level in more than six years. And of course, stocks are down, with the S&P 500 off more than 6% since hitting a record high just a couple of weeks ago.

Why is the market so panicky? Continue reading "Mixed Signals"

Silence is Golden

Back in the early 1980s, when I was a young cub reporter fresh out of college covering the bond market for a Wall Street trade newspaper, I used to scratch my head over how traders and investors would try to discern what the next Federal Reserve move would be. Obviously, not much has changed since then.

Back then, however, the Fed rarely said anything, and when it did, its words would be couched in the famous “Fed speak,” in which the chairman – Alan Greenspan was the best (or worst) at it – said a bunch of gobbledygook that few people could understand but spent countless hours trying to decipher.

In my innocence, I asked one of the senior reporters, “Why doesn’t the Fed just tell us what it intends to do instead of making everybody guess?” I don’t remember ever getting a good explanation.

The problem with that type of “communication” – or lack of it – is that investors are prone to make panicky, knee-jerk reactions to whatever the Fed eventually does.

Since then, the Fed, to its credit, has made a real, concerted effort to become “more transparent” in its communications and avoid surprises as much as it can. The process started with Ben Bernanke, and Jerome Powell has really run with it, holding a press conference after every Fed meeting, or 10 times a year, rather than quarterly as his immediate predecessors did. That’s on top of the countless public speeches and congressional appearances he makes, plus those of the other members of the Fed’s Board of Governors and the presidents of the regional Fed banks, those with a vote on monetary policy.

Now, it seems, we’re at the point where the Fed is confusing the markets by having too many voices say too many things, rather than confusing the markets by saying as little as possible. Which situation is better, I’m not sure.

Case in point: Continue reading "Silence is Golden"

Tonic For The Temper Tantrum

One of the many memorable scenes in the 1978 comedy classic Animal House is when a 20-year-old Kevin Bacon tries to tell the crowd at the Faber College alumni parade to “remain calm, all is well!” just before he gets trampled flat by the onrushing mob.

I flashbacked to that this week watching global bond yields sink to their lowest levels in several years even as the overall economy – in the U.S., at least – seems to be in pretty good shape. The yield on the benchmark 10-year U.S. Treasury note fell below 2.22%, its lowest level since September 2017. That put it well below all of the Treasury’s securities that mature in one year or less, meaning you could get a higher yield by putting your money in a one-month T-bill (2.35%) than you could lending your money to the government for 10 years.

Still, that was a lot better yield than you could get overseas, where government bond yields sank even deeper into negative territory. The eurozone benchmark, the 10-year German bund, dropped to negative 17 basis points while the Japanese bond of the same maturity hit negative nine basis points, their lowest levels in nearly three years.

Yet, on that same day, the Conference Board’s U.S. Consumer Confidence Index for May jumped nearly five points to 134.1, its highest point since last November. The index “is now back to levels seen last fall when the index was hovering near 18-year highs,” noted Lynn Franco, the group’s senior director of economic indicators. “Consumers expect the economy to continue growing at a solid pace in the short-term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead.”

Clearly, there’s a serious disconnect between American consumers, who are in a bullish mood – not surprising, given the unemployment rate of 3.6% – and the bond market, which has pushed yields on the safest instruments down to levels you would expect in a recession. Who’s right? Continue reading "Tonic For The Temper Tantrum"

Sell In May? Wait For The Powell Put

After turning in one of its best January-April performances in more than 20 years, the stock market has suddenly run out of gas in May. We’re nowhere near correction territory – the S&P 500 is down about 2% so far this month after climbing more than 18% in the first four months of the year, and up 22% since the Christmas Eve bottom. Yet the financial press has been filled with “sell in May and go away” stories, citing the Wall Street urban legend – or historical trend, take your pick – that all the money that’s going to be made this year has already been made, so you may as well cash in your winnings and sit out the rest of the year.

The major impetus behind the dip – which doesn’t even meet the definition of a “dip” yet since few people seem to be buying on it – is President Trump’s announcement that he has upped the ante on the trade war with China, raising worries that talks between the two countries will collapse. The recent spate of high-profile IPOs from Lyft, Uber, Pinterest and other companies is also signaling that the stock market may have peaked.

Which raises the question: Is the Powell Put going to come to the stock market’s rescue again in the near future? How deep will a drop in the stock market – assuming it keeps dropping – have to get before the Federal Reserve intervenes and cuts the federal funds rate? Continue reading "Sell In May? Wait For The Powell Put"

Sweet Surrender

Janet Yellen had a pretty easy job when she was the Federal Reserve chair. By keeping interest rates at or near zero for years on end, she never heard any criticism from the president, government officials or the financial markets. Since he became Fed chair a little over a year ago, Jerome Powell has gotten nothing but flack, from President Trump – who was at it again last week – to a whole swarm of people on Wall Street complaining that the Fed was ruining their returns.

Powell got the message several months ago, and last week he handed in his formal surrender. Not only did the Fed leave interest rates alone at its monetary policy meeting, but it indicated that there would likely be no more rate hikes the rest of this year, and maybe next year, too. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy,” Powell said.

The Fed also called a halt to the runoff in its still humungous Treasury securities portfolio. Beginning in May, the Fed will slow to $15 billion – from the current $30 billion -- the monthly redemptions of its Treasury holdings, with the runoff to end in October, meaning its balance sheet will start growing again.

So now Powell and his Fed mates can sit back blissfully and listen to the silence, at least for now. Continue reading "Sweet Surrender"