A Shot In The Arm

A shot in the arm.  Stocks rose yesterday after the World Health Organization called the Coronavirus a global health crisis… go figure.  The US economy grew slightly more than expected in the fourth quarter, but there were some troubling numbers behind the growth.

 

N O T E W O R T H Y

 

  • What the… Yesterday’s market action was confusing to many, so your’e not alone if you were watching and were left scratching your head. Markets started the day in the red as news of the spread of the Coronavirus was all over the tape.  The US State Department urged US travelers to avoid China and airlines continue to cancel flights into the country. Expectedly transportation, tourism, and crude oil were punished.  As if things could not get any worse the WHO finally announced that it was labeling the outbreak as a  global health crisis… but wait… the market rallied on the news to close in the black. The only real hint of anything positive in the news was that the WHO praised China for its rapid response.  I am not sure if that is good enough for a risk-on investment thesis but someone sure did.  The only feasible answers are 1) the high frequency algorithms picked up the news as positive and caused the bump, or 2) bad is good again as investors may feel that the Fed may lower rates in response to the breakouts’ impact on the economy. Believe it or not, the latter is more likely than the former and all you have to do is look at the bond market for answers.  Two-year treasury yields gave up -3 basis points to close at 1.38%.  That is a lot for the short maturity which is more likely to be affected by Fed policy than speculative trading.  Sorry, hotshot high frequency hedgies, maybe next time you can take credit.
  • A too-cold compress.  OK, so why have we had such a rally in bonds recently.  Check out my attached daily chartbook to get a graphical view on what has been happening.  Start with chart 17, the Fixed Income Cheat Sheet, and look at how much the yield curve has flattened in just the past week.  Chart 18 shows the yield spread between a 3 month T-bill and 10-year treasury note… it is inverted, as I reported to you in yesterday’s note.  Finally charts 19 and 20 show the Aggregate Bond Market rally since the new year and the 10-year treasury yield breakdown.  Things are supposed to be good, right? The stock market remains resilient, even in the face of a global health emergency that could weaken the economy. Just how much is probably speculative at this point, but some analysts believe that the US GDP can lose as much as -.40% as Chinese Tourism is curbed.  Other analysts believe that the virus will cost the global economy far more than the -$40 billion price tag for SARS.  China is much more critical to the global economy today than during the SARS outbreak.  OK, that’s not encouraging.  What about the economy? Yesterday, the Bureau of Economic Analysis reported that the US GDP grew slightly better than expected in the 4th quarter at an annualized rate of +2.1%.  As usual, the devil is in the details, and what those showed bears some comment.  Let’s start with the easy one: Business Investment fell by -6.1%.  That is the third declining quarter in a row and it is the worst decline since 2009.  On to the consumer… you knew this one was coming. Personal Consumption, which makes up about 2/3 of the economy, grew at a rate +1.8%, missing economist estimates and down from the +3.1% growth in the prior quarter.  Thankfully, consumers remain confident but spending, not confidence, powers the economy.  Bond traders are pragmatic and make trades based primarily on economic data, so perhaps they, unlike equity traders, seem to be watching the tape more closely these days.  Are more rate cuts coming? Tough to tell, but if you look at the probabilities based on Fed Funds Futures, there is a 61.8% chance of a rate cut in July (that’s good odds on Wall Street).  Just one week ago the odds looked quite different with just a 39% chance of a cut… and a 7.5% chance of a hike!  Someone is watching the news and numbers carefully.

 

THE MARKETS

 

Stocks made an interesting turn-around yesterday closing up after trading in the red for most of the session.  The S&P500 climbed by +0.31%, the Dow Jones Industrial Average traded up by +0.43%, the Russell 2000 slipped by -0.06%, and the NASDAQ Composite Index advanced by +0.26%.  Bonds climbed as well and 10-year treasury yields were unchanged at 1.55%. Crude oil gave up another -2.23%.

 

NXT UP

 

– Personal Income is expected to have grown by +0.3% and Personal Spending is expected to have grown by +0.3% compared to last month’s +0.5%  and +0.4% respective increases.

– The PCE Core Deflator may come in at a year over year rate of +1.6, same as last month and stubbornly below the Fed’s +2% target.

– University of Michigan Sentiment is expected to be 99.1, same as the last reading.

– This morning Honeywell, Caterpillar, and Colgate-Palmolive beat while Weyerhaeuser missed estimates.  The ones to watch are Chevron and Exxon Mobile, both expected before the bell.

– Lots more earnings next week along with a bevy of economic numbers.  Check back on Monday for details and calendars for the week.

 

Can we talk?

 

We will be hosting a seminar in Boca Raton next week and would love to have you stop in.  Call the trading desk to reserve your spot. I will be speaking at the event and will be meeting with clients in Boca and Miami all week and I would love to spend some time with you.

daily chartbook 2020-01-31

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