The Jitter Bug.

Stocks rallied today. Why? Because they could. The catalyst for the rally was some economic data that suggested that the economy was growing. However, bond investors have taken an entirely different path. Investors are fretting over the inversion in the yield curve, are concerned about oil and the threat of recession. So like a pair, bonds rallied with stocks.

Investors attitudes have been interesting. High grade bond funds are being exited, utilities are being sold and the outlook feels uncertain. On the subject of trade, we get lots of bluster from Trump regarding China, but the talks between the U.S. and Europe have not gone anywhere either.

Equities rallied because U.S. inflation was softer than expected and the read puts pressure on Powell for the Fed to cut rates. The PCE Index (Fed’s preferred inflation measure) rose just 1%. It was previously reported at 1.3% (annualised).  Growth is also slowing with the first quarter GDP growth rate annualised at 3.1%, a little less than the 3.2% estimated last month.

For equities, this month has been a sorry month. Each of the 3 main indexes are down at least 5% for the month. Today’s closes marked the first advance for indexes this week. Trade jitters aside, the inversion between 3-month bills and 10 years is the widest in 12 years. This inversion has led to financial index falling 1.2%, as bank stocks were sold. The energy sector fell 1.2% as oil slumped 4% at one point due to a smaller than expected decline in inventories in the U.S.

Bonds are nearing a 20-month low. And bond investors are fixated that the Fed’s next move will be to ease. Policy makers keep talking about adjusting policy should inflation continue to fall. This is providing the ammunition for bond investors to believe a rate cut is the next move. Interest rate futures have an 81% chance of a cut by December and a 40% chance for cut for two cuts this year. The 3-month bill is trading at 2.37% and the 10-year is at 2.22 an inversion of 15 bp.

Meanwhile, Trump wants an overhaul of Fannie Mae and Freddie Mac by Congress. Otherwise, he is threatening to privatise the two agencies.

In Spain, the CPI rose at the lowest rate for 16-months at 0.8%. Spanish retail sales were up 1.1% y/y April.

Market Recap.

Equities: The S&P 500 rose 0.21 and the Dow rose 0.17%.  The Vix closed at 17.3 while the Stoxx Europe 600 Index rose 0.4%.

Currencies: The Bloomberg Dollar Index was flat. The euro rose 0.1% and yen rose 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.217%. The 2-year is trading at 2.067% and the 30-year is at 2.644%. The U.S. curve closed on the day with the following closes 2/10 at 14.8 bp, 2/30 at 57.7 bp and the 10/30 closed at 42.7 bp. The U.S. 5-year closed at 2.025%. The 2/5 spread is now -4.40 bp. The ten-year bund closed at -0.172% and the British gilt closed at 0.90%. The 10-year yen gilt is trading -0.081%.

Commodities: WTI fell 2% while gold gained 0.5%.

Bitcoin is trading around $8,050.

Aussie Market Today.

Equities could stage a small rally as the sell off pauses.

Bonds look to be bid on the day. The markets appear to be on edge and looking for rate cuts globally and mounting concerns over growth. Yesterday’s selloff may turn out to be an anomaly.

Credit remains bid and especially so in the shorter maturities. The Aussie Itraxx has been drifting wider but specific credits are tightening. Any sell off could see demand for credit increase.