The market is behaving just like a fast food junkie looking for its next sugar hit. There was a surprise rise in the jobless claims and instead of the equity market selling because economic conditions could be slowing, stocks rallied halting a two day fall in prices. The sugar hit is of course an easing or rather an expected easing and the Fed is now being bullied into a corner by stocks, bonds and no doubt a dissatisfied president who has been tweeting for rate cut for a few months now.
Over the month, stocks have enjoyed a good time. The S&P 500 is up about 5% for the month and much of that rise has to do with an expectation that rates in the U.S. will be cut. The big winner on the day was Walt Disney Co. Disney was up 4.4% and gave the S&P the boost it needed. Twitter fell 3.1% as concerns over costs rise. Once again volume was less than average.
For traders, the focus will be on the upcoming FOMC meet, and then the G20 at the end of the month. All eyes will be on President Trump and President Xi.
The yield curve steepened today as the front end of the curve rallied a little harder than longer maturities. With a rate cut on the cards, the 2-year rallied 6.2 bp to end the day around 1.83%.
The driver for the rate-cut expectations was the jobless claims which seasonally adjusted indicates about 222,000 people filed for benefits. The market was expecting 216,000. The economy only created 75k jobs in May and that was combined with wages increasing at the slowest annual pace for 8-months suggesting the economy may be cooling.
The Atlanta Fed is now forecasting GDP growth at and annualised 1.4% growth rate. Import prices fell 0.3% and this was the biggest decline since December. This points to the impact of tariffs being absorbed in the U.S. rather than China and points to weaker inflation. Weaker inflation and weak jobs growth, makes the argument for a rate cut compelling. The Fed meets on June 18-19. A rate cut next week now has a probability of 29.2% versus 16.7% a week earlier.
The instability caused by the Trump administration has provided the euro with a boost as trade uncertainty has led to greater use of the euro. The euro’s share in global foreign reserves, debt issuance, deposits and outstanding loans has increased. The U.S. dollar’s market share has declined with yen and renminbi market share increasing.
In foreign currency debt issuance, the use of the euro has increased by 2.5% and now represents 22.7%. In global loans, loans denominated in euros, now represents 19.3%. And in foreign exchange trading, the euro represents about 37.7% according to the ECB.
Oil rose and at one point was up 4.5% following reports that two tankers in the Persian Gulf had been damaged by forces unknown. Elsewhere, tensions are at near boil over with clashes in Hong Kong between protestors and police and even as far away as Sudan.
The argument that equities should rally if the Fed eases, I find is an erroneous argument but one that the market is running with. Revenues have fallen but not as much as expected and the early indications are that the U.S. economy is slowing. With the probability of tariff wars increasing why would any captain of industry invest in capex or factories rather than do a share buyback or borrow to increase a dividend?
And this is the problem. In the uncertainty, business are not making choices for the future. For some they are now looking for new people to partner with in the logistics chain whilst at the same time trying to contain costs or maintaining costs as they swing away from Chinese manufacturing.
Interest rates and bond rates are at lows and this is even more concerning because at these levels there should be inflation and there should be growth. Times probably have never been better. Long term PE’s are higher than the average of 15 or 16 and earnings growth has slowed yet the multiplier keeps rising. Why?
For the soothsayers, a number of market analysts from the haughty JPM through to Morgan Stanley through to the mundane are all concerned about recessions and are providing warnings about recessions, yet stocks continue to rally.
As a bond person, I don’t get this reaction. I worry about increasing budget deficits, I worry about increasing the debt ceiling and I worry about the general indebtedness of the markets. The concept and the reality of $11.7 tr of negative yielding bonds I find absurd, yet here we are.
What we do have now in the U.S. is 10-years (well almost) of growth. What we have not had is a recessionary correction which would be usual. The excesses of the past have not been so obvious this time and that’s the concern. The amount of leveraged loans and high yield bonds held outside the banking system is high and we don’t know how these owners will behave if and when a crunch hits.
Credit will continue to tighten as demand for income remains. Risks will be taken to get that income and that may not be such a good thing especially for those venturing into high yield, which is where many are now heading.
In the meantime, all you can do is go with the flow and become further embittered in one’s thoughts. Good luck.
Equities: The S&P 500 rose 0.4% and the Dow rose 0.39%. The Vix closed at 15.82 while the Stoxx Europe 600 Index gained 0.2%.
Currencies: The Bloomberg Dollar Index was flat.
Bonds: (as at 4.30pm). The ten-year is trading at 2.093% while the 2-year is trading at 1.834% and the 30-year is at 2.60%. The U.S. curve closed on the day with the following closes 2/10 at 25.7 bp, 2/30 at 76.6 bp and the 10/30 closed at 50.7 bp. The U.S. 5-year closed at 1.834%. The 2/5 spread is now -0.1 bp. The ten-year bund closed at -0.242% and the British gilt closed at 0.838%. The 10-year yen gilt is trading -0.113%.
Commodities: Crude rose 2.2% and gold rose 0.6%.
Bitcoin is trading around $8,318.
Aussie Market Today.
Stocks can rally on the day. The expectation is that the RBA will cut again at some stage especially if the unemployment rate starts to rise. This is the sugar hit that stocks are looking for and no doubt that trend can continue.
Aussie bonds continued their rally and look set to continue. The unemployment rate has jumped unexpectedly and as the RBA has said it is focussing on unemployment ,this was the catalyst for the fall in yields. For the first time I believe, the three-year bond in Australia is under 1%. The 3-year is now about 0.99%. The currency is taking a battering and is now trading around 69c.
Credit continues to be bid and especially so in the shorter maturities.