Market Commentary 8/9/19

Wow! Bond yields around the world plummeted as fears of a full-blown trade war with China escalated creating volatility in all markets. The U.S. China trade war has increased the odds of a U.S. recession as the deterioration in trade talks will add additional stress to decelerating global factory output.  This prompted central banks around the world to cut interest rates further as the race to zero, or negative rates goes on. Gold also surged as a safer-haven investment. How this all will end is anyone’s guess.

Back in the U.S., the economy remains strong but slowing as the Trump tax cuts wear off and U.S. companies reconfigure global supply chains due to uncertainties with China. Recession concerns have increased as GDP forecasts have been cut and corporate earnings are slowing. This is what the inversion of parts of the U.S. yield curve is suggesting.  An inverted yield curve is one of the best indicators of an oncoming recession. All of this activity pushed U.S. bond yields to levels thought not possible just a few months ago.

On the plus side, one group that is happy see rates plummet are borrowers. Refinance applications have skyrocketed and while the home purchase market has been stalling, the hope is that lower interest rates will spur buyers into action. While we have been cautious about locking in interest rates once the 10-year Treasury note touched 2.00%, the huge surge in loan applications may affect bank pricing so we continue to advise to lock-in. With interest rates so low, for some borrowers, the real cost of funding is near zero which should help consumers make additional purchases and lower monthly expenses.

Aug-02-blog 2019

Market Commentary 8/2/19

Bond yields touched the lowest level since 2016 in a jam-packed information-filled week which included reporting on inflation and the monthly jobs report, the Fed Open Market Committee meeting, and renewed threats of increased tariffs on China.

The core PCE reading for June, the Fed’s favorite inflation reading, came in a tick lower than expected. Inflation remains a major conundrum for global central bankers. Even with ongoing massive stimulus programs in place, inflation readings in developed countries remain below targets. This is one of the big concerns for the Fed and is one of the main reasons that the Fed is comfortable lowering short term lending rates.

As expected, the Fed reduced short term lending rates on Wednesday by one-quarter of one percent. Equity markets fell during Chairman Powell’s press conference when he suggested that further Fed easing might not be necessary although not altogether ruled out either. Equity markets have become addicted to accommodative policies and stock pickers were looking for confirmation of ongoing rate reductions.

Trade discussions with China took a turn for the worse on Thursday, which is a big challenge facing the economy. It is hard to handicap how the trade dispute will influence monetary policy and what influence these talks will have on businesses. However, one should pay close attention to bond yields which dropped soon after the White House announcement. With some sectors of the economy slowing, the fear is the added costs of tariffs at both the business and consumer level could push the U.S. into recession sometime in 2020. 

Friday saw a good June Jobs report with 164,000 new jobs created in the private sector. Unemployment remains near historic lows at 3.7%. This report supports the narrative of a strong domestic economy. However, the positive news on job creation was overshadowed by the trade tariffs threats made the previous day.

Rates are now so low absent a full-blown recession which does not appear to be likely near term, it is hard to argue against locking in interest rates.  With many mortgage products at ultra-low levels, this has spurred both refinance and purchase activity. The monthly savings should be good for consumer spending and may keep real estate prices from falling further.