Don’t Stop the Music

Don’t stop the music.  Stocks shrugged off Friday’s yield curve revelations yesterday as markets rallied in response to well… nothing really.  Equity markets, in a mean reversion move, traded higher as seller exhaustion gave way to speculative buying.

WHAT YOU NEED TO KNOW:

1)  Consumers, who make up around 2/3 of the economy, were less confident this month.  Yesterday, the Conference Board’s Consumer Confidence number fell to 124.1 from 131.4, missing expectations. The number gauges average consumers’ confidence on both current and future conditions.  In yesterday’s case, confidence slipped on both fronts.

2)  The housing market is still showing signs of weakness.  Yesterday morning’s Census Bureau housing numbers showed greater than expected pullbacks in February.  Housing starts and Building permits fell by -8.7% and -1.6% respectively.

3)  Healthcare is a thing again.  The Administration opened up a new front in its political battle placing the Affordable Care Act in its sights.  In somewhat of a surprise the DOJ announced plans to completely dismantle the act, changing its prior strategy of challenging only parts of it.  The move brought a swift response from Democrats… and stock traders put pressure on managed care companies.

THE MARKETS:

Stocks opened yesterday’s session on a high note after two days of confusion and selling on recession fears.  Stocks slowly lost ground throughout the session only to rally sharply into the close.  The only news of the day was largely negative for stocks with weak economic numbers, earnings misses, a newly brewing healthcare brawl, more Brexit confusion, and a still-inverted yield curve.  Stock traders didn’t seem to take any of it into account as the S&P500 rose by +0.72 %, the Dow Jones Industrial Average climbed by +0.55%, the Russell 2000 advanced by +1.01%, and the NASDAQ 100 traded up by +0.4%. The advance was led by Energy and Financials, which were under pressure prior.  The move suggests that yesterday’s price action was reversion to mean.  Often after markets become oversold they get a small bounce as selling pressure weakens.  The opposite holds true for overbought conditions.  Bonds continued to hold their ground trading up a fifth straight day in a row leaving 10 year yields at 2.42%, slightly higher than Monday’s close.  Yesterday’s 2 year floating rate treasury note auction showed strong demand, indicating that bond traders are betting on upside for the front end of the yield curve. What that hints to is the growing belief that the Fed may actually lower interest rates in the months ahead.  The yield curve remains an important indicator of investor views of the economy, which is why there is so much chatter around last week’s inversion.  Because it is geek-out Wednesday, I though it would be a good day to demystify the inverted yield curve.  Please find this week’s geek-out topic attached.

WHAT TO LOOK FOR TODAY:

This morning we will get Trade Balance figures from the US Census Bureau and they are expected to show a -$57.0 billion deficit for the month, which is slightly better than last month’s -$59.8 billion.  The EIA will release its US Oil Inventory report this afternoon, which will be of interest to energy markets in the wake of recent strength in crude prices.  Apparel maker PVH, Paychex, and Lenar are scheduled to announce before the bell, amongst others.  Lenar fell short of Wall Street estimates by -7.6%.  There will be many ECB governors speaking this morning as well as at least one US Fed speaker.  The US Treasury will auction off $18 billion 2 year notes and $41billion 5 year notes.  Both auction results will be watched carefully as the yield curve saga continues to play out.

daily chartbook 2019-03-27

geek out topic Inverted Yield Curve