That Gnawing Sensation

That gnawing sensation.  Stock traders try to find optimism but just can’t shake that hidden fear that something bad may lie ahead as equities closed out yesterday’s session slightly down.  Equities started yesterday’s session in a solid risk-off mode and later recovered some losses ultimately losing ground to close in the red.

WHAT YOU NEED TO KNOW:

1)  The yield curve is still inverted and people are starting to take notice.  It is hard to avoid commentary on the inverted yield curve predicting recessions and even the Dallas Fed Chief Robert Kaplan weighed in saying that the yield curve would have to remain inverted for a quarter to have a real impact on his decision to possibly lower rates.  He is right!  Statistical studies suggest that the inversion’s recession prediction ability is most accurate when it persists for a financial quarter.  We are 4 days in.

2)  Brexit? Wow!  WHILE YOU SLEPT, the British Parliament rejected all of the alternative measures brought to the floor after temporarily arresting the power away from PM Theresa May.  The most popular amongst the losers were re-vote and a watered down Brexit in which GB would stay in an EU customs union.  Theresa May, meanwhile, offered to resign if the House voted on her twice-defeated solution.  It is not likely to garner enough votes and she will most likely not remain in her post either.  The big mess continues and while traders in US equities markets are starting to notice, they have not yet factored in any Brexit risks yet.

3)  The trade deficit narrowed last month.  Yesterday’s trade balance number narrowed to -$51.1 billion from -$59.8 billion unexpectedly.  Though it is good for the economy, it is most likely a temporary move related to rush imports to avoid the Administration’s now-pushed-out tariff increase cliff and the snap purchases of soybeans by the Chinese government as a good will negotiating gesture.  A strong dollar and a strong economy relative to the rest of the world usually causes imports to increase and exports to decrease, widening a trade deficit.

THE MARKETS:

The usually buttoned up bond markets are where all of the action seems to be these days as 10 year yields hit 15 month lows in yesterday’s session, reminding stock traders that they are relevant.  If you look at chart 19 in my attached daily chartbook without reading the title you would think that you are looking at a chart of some growth company or technology unicorn, but alas it is a chart of the aggregate bond market.  Bonds rose again in yesterday’s session and ten year yields hit lows not seen since December of 2017 closing the session at 2.36% yield.  The 2/10 yield curve flattened out to +15 basis points and the now-famous 3 month / 10 year curve remains inverted at -6 basis points.  Equity traders attempted to fight off recession fears but couldn’t manage a positive close as the S&P500 dropped by -0.46%, the Dow Jones Industrial Average fell by -0.13%, the Russell 2000 receded by -0.39%, and the NASDAQ 100 sold off by -0.58%.  The worst performing sector in yesterday’s session was healthcare in response to the Administration’s renewed efforts to repeal Obamacare.

WHAT TO LOOK FOR TODAY:

This morning, the Bureau of Economic Analysis will release its read on 4th quarter annualized GDP. Analysts are expecting a quarter over quarter annualized growth of +2.3% down from last quarter’s +2.6%.  This will be a closely watched number and though the consensus is calling for +2.3%, there is a wide variation of opinions.  Personal consumption will also be a part of the release and it is expected to have grown by +2.6% down from +2.8%.  Later this morning, we will get Pending Home Sales, which are expected to have fallen by -0.5% month over month after growing by +4.6% in the last period. Today we will hear from the Fed’s: Clarida, Bowman, Bostic, and Bullard throughout the session and they are sure to weigh in on where they feel rates should be and, of course, the yield curve.

daily chartbook 2019-03-28

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