Signs of a slowing global economy, trade tensions with China, geopolitical concerns over Brexit, and Italian debt levels have all played a role in the very volatile stock market swings the last several weeks. Compounding these concerns is the rate trajectory set by the Federal Reserve which is also weighing heavily on the overall market. While business sentiment remains high, if there is not a resolution on at least some of these very important matters, confidence will erode quickly and negatively impact business and consumer spending. We are already witnessing a slowdown in high-priced real estate markets, and the unsettling seesawing in the equities markets has investors on high alert.
As of late, the retreat of the 10-year Treasury bond yield may be an early warning sign that the narrative about our own U.S. economy is changing, as well as the global growth narrative. Rates have broken lower from around 3.25% to now under 3.07%. The move lower on the 10-year Treasury bond has also further flattened the yield curve, which is being closely watched as it moves closer to inversion. An inverted yield curve is one of the key recessionary signals monitored by market watchers.
This was a dramatic week for the markets: oil fell, possibly triggering a bond rally, bond yields fell (even with inflation moving up and reaching the Fed’s 2% target). Core inflation readings may cool in the near future should oil remain lower. Copper, known for its economic forecasting ability, also has traded poorly, yet another sign that the global economy is slowing. Housing fell off this week, further helping interest rates. This makes one wonder how much higher, if, at all, interest rates can go, and I wonder if this is the peak. Keep an eye on the U.S. dollar, which has been on a tear. U.S. dollar fluctuations will also impact interest rates.
With this in mind, we are biased toward floating interest rates to see what happens over the coming weeks. Our feeling remains that interest rates may move higher, but the markets seem to like ~3 10-year Treasury yields, and we think we may see rates touch down to these levels. With housing and commercial real estate cooling off and a very volatile stock market, rates may be pushed lower in the coming weeks.