Bond Market Throws a “Curve”

Bond Market Throws a “Curve”

The optimism surrounding US/China trade had stocks in rally mode up until Thursday, when it was clear neither party could reach an accord. Instead both sides decided to enact another round of tariffs on $16.0B worth of each country’s goods. The market reaction was of course typical, as stock, bond and metal markets all began to falter and the US Dollar moved higher. But all of that failed to catch any real momentum when on Friday, Fed chairman Powell gave a speech that was a tad more dovish than Wednesday’s FOMC minutes. Or least it was a case of what traders wanted to hear, whether he really was or not. Powell merely stated that he saw no risk of an “overheating” economy – when the rest of his speech was essentially a repeat of the Fed’s August policy statement. Nevertheless, stocks turned green shortly after the open Friday with most indices finishing the day at or near new interim highs. Keep in mind, that Wall Street has been expecting the Fed to turn dovish, for obvious reasons, for quite some time now, so I wouldn’t expect the rally we saw today to feed on itself, as many traders have already discounted the event in some shape or form.

Away from stocks, Powell’s use of the word “overheating” is still miles away from what’s actually happening in the economy. As the June, July and August releases suggest a super cooling of the economy is at hand following a rather robust 1st half (aided by the $300B in relief spending). July Existing and New Home Sales continued to slide – into multi-year lows. In August, the Kansas City Fed manufacturing index fell to 14 from 23, while the Markit PMI (Manf. and Services) opinion poll slipped to 55.0 from 55.7.

Bonds gained a little traction after the China and Powell news. Treasuries advanced but mostly at the long-end which flattened the curve to an extremely thin 20 bps – incidentally it was 54 at the beginning of the year. Powell’s remarks also sent the Dollar lower, which helped turn things around for both the energy and metals markets. Now to be clear, a flattened yield curve is bearish or monetarily restrictive, whereas today stocks were acting as if Powell’s remarks were dovish and/or bullish. So, given that, I’m very curious to see just what stock bulls hope to accomplish here in the next handful of weeks while warning signs of a  liquidity trap and/or crisis continue to mount.

Best Regards,

David Burgess

VP Investment Management



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