High, high, higher.

Markets, and especially so the stock market, continued their rise. Equities hit another record high two days in a row and saw a second consecutive weekly advance. The key for the moment is that the Fed will ease again and its this belief that’s driving markets.

On the day, technology led the way along with industrials. Drug stocks held the market back. Ford gained 2.65% after it announced it was going to develop autonomous cars with Volkswagen. Johnson & Johnson slid 4.1% after it was reported that the Justice Department was pursuing a criminal probe. Volume on Friday was light with just 5.68 million shares traded on the exchanges versus a 20-day moving average of 6.71 bio shares.

The key to the gains is that the Fed has said rates are not rising anytime soon. Other central banks are also making similar noises. Rates are not going up anytime soon and that’s allowing equity markets to rally. And it does not hurt that both Singapore and China are seeing weak data in their own economies. And a week would not go by if Trump did not make an announcement about trade in some form.

The bond curve steepened marginally Friday. The bond market is looking for a 25bp cut and the current levels reflect that move. The 2-year is fully reflecting that sentiment. The expectations of a 50bp cut in July rose slightly to 23.5% from 19.9%.

Charles Evans the Chicago Fed President threw his comments behind market sentiment by suggesting that the Fed should cut by 50bp by year end. Evans believes that inflation requires a stimulus of some form and that a cut is required to push inflation higher. Evans believes that a half point easing would help lift inflation to 2.2% by 2021.

In other news, and this will have the Ted spreaders scratching their heads, the U.S. markets regulator asked banks to promptly end their use of the Libor lending benchmark ahead of the 2021 deadline. Globally Libor is being used to price some $300tr of assets ranging from credit cards through to corporate loans.

The Regulator is concerned that the discontinuation of Libor could have a significant impact on financial markets and could produce a material risk. The Regulator is hoping for an orderly transition to an alternative reference rate .

For those interested in the movement of goods this week provides an interesting window. Two major U.S railroad companies report this week. But of more interest at least to me is shipping volumes.  Container volumes surged towards the end of 2018 and were weak in the first quarter.

As demand has softened, so too the demand for containers. And this trend unfortunately looks intact. The one-year U.S. freight volume has continued to slip since December.  Falling freight demand is also problematic for the truckers who account for 70% of U.S. shipment tonnage. The U.S. Trucking Index has significantly underperformed the broader market this year gaining only 4.9% vs the S&P 500 19.4% advance.

Tropical storm Barry is causing oil operators in the Gulf of Mexico to limit output.  Some 59% of crude production in the Gulf of Mexico (U.S. regulated) has been cut. The oil rig count also fell for the second week. Drillers cut 4 rigs in the week ending 12 July and is now at the lowest number since February 2018. The Turkish lira continued to weaken on reports that it had taken delivery of a Russian missile system much to the chagrin of the U.S.

The Rant.

Where to from here for interest rates? Fed futures are implying a 25 bp cut in July and an easing of almost 70bp for 2019. The yield curve steepened this last week and this is causing bond investors to think about what’s next.

Global growth and domestic inflation are the key for the Fed. However, inflation is stirring a little and this in time could cause concerns. We are already seeing these concerns as investors are reluctant to participate as keenly in the bond auctions as they have participated in recent times.

This reluctance is being borne in the shape of the yield curve. The 2-year is currently anchored. However, this has not stopped the 30-year from drifting higher. Also, of concern is that the debt ceiling is close to being hit again. Unless Congress raises the borrowing authority the government may run out of cash by September.

Investors are highlighting their concerns by avoiding bills that mature in mid-September through to early October. Yields in these maturities are higher as dealers avoid the risk of non-payment should Congress not lift or suspend the debt cap.

Market Recap.

Equities: The S&P 500 rose 0.46% and the Dow rose 0.90%. The Vix closed at 12.39 while the Stoxx Europe 600 Index gained 0.05%.

Currencies: The euro rose 0.2% and the Bloomberg Dollar Spot Index fell 0.3% while the pound rose 0.4%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.124% while the 2-year is trading at 1.845% and the 30-year is at 2.648%. The U.S. curve closed on the day with the following closes 2/10 at 27.3 bp, 2/30 at 79.8 bp and the 10/30 closed at 52.3 bp. The U.S. 5-year closed at 1.871%. The 2/5 spread is now 2.2 bp. The ten-year bund closed at -0.248% and the British gilt closed at 0.839%. The 10-year yen gilt is trading -0.063%.

Commodities: WTI rose 0.1% and gold rose 0.8%.

Bitcoin is trading around $10,625.

Aussie Market Today.

Stocks should continue their rally. Asian markets are likely to be on the rise today and that should assist the Aussie market to continue its rally.

Bonds are likely to drift on the day. The short end feels supported. However, we could see a little drift higher in the longer maturities. Bonds are looking for direction from offshore markets and these markets at present are a little directionless.

The bid tone in credit remains. Senior bank debt in the shorter maturities are in demand.
Geopolitical risks remain high and still need to be monitored.