I hope you all had a safe, fun Independence Day.
But get ready for some fireworks after the fourth!
Market volatility over the past few weeks has been all about trade, specifically China and the U.S. trading tariffs. Those worries haven’t abated.
The Dow Jones Industrial Average has tumbled since mid-June, though the index rebounded a bit last Friday. The S&P 500 has also struggled.
How have Chinese stocks fared?
The Shanghai Composite is down 22% this year.
The stock market – our favorite voting machine – indicates that China is clearly the loser in the trade war, at least so far.
Long-term Treasury bonds, on the other hand, have done much better over the last couple weeks.
The 30-year government bond yielded 3.10% on June 13, the day the Federal Reserve decided to hike rates; on Monday, the long-dated government bond closed under 3%.
That makes six of the past seven rate increases when the yield on the 30-year Treasury has fallen at least a week after the Fed made its move.
What does this action tell us?
Perhaps investors aren’t convinced the Fed is on the right path. Or maybe the market has come to the right conclusions about inflation, economic growth, and future rate hikes.
Danger in the Flatlands
The rosy scenario the Fed paints should have convinced market participants to move long-term rates higher and the yield curve steeper. The central bank’s actions also should have prompted investors to take on more risk and buy stocks.
I remain concerned about the flat yield curve… so should you.
Historically, a flat curve has warned of trouble ahead. And if long-term rates move below short-term rates, a recession is a near certainty. I’ll continue to keep a close eye on the yield curve.
Treasury yields had been stuck between 3.01% and 3.06% for a while.
That changed last week when the saber-rattling about trade tariffs intensified, sending yields to 2.97%
If stocks fall hard in the months ahead, we could see another stampede to the safety of Treasury bonds and an even flatter yield curve. In the worst-case scenario, the yield curve could even invert.
May Home Sales Don’t Move Market
Sales of existing homes fell 0.4% sequentially in May and 3% year over year. Even though sales of previously owned homes aren’t as important to the economy as new-home sales, this metric provides useful insight into overall housing demand.
New-home sales handily beat expectations for the month, with the number of transactions increasing 14.1% from year-ago levels.
Unfortunately, prices fell by 1.7% on the month and 3.3% on the year.
That’s not a disaster, but it is a mixed bag.
PMI on Fire
On Monday, the Institute for Supply Management released the June purchasing managers index (PMI) for the U.S. manufacturing sector.
The monthly survey queries purchasing managers from about 300 manufacturing companies about the general direction of production, new orders, order backlogs, inventories, employment, and prices.
This forward-looking indicator surprised to the upside, coming in at 60.2. That’s a 1.5 percentage point increase over May. PMI readings above 50 reflect an expansion in economic activity, while values above 58 usually imply economic growth of about 4%.
PMI is a proven market mover, but this upside surprise didn’t move the market much at all. At these levels, stocks have already priced in a lot of good news.
On the Horizon
After Independence Day, the economic releases come fast and furious.
The Fed releases the minutes from its most recent meeting today, providing investors with more insight into the central bank’s views.
I wouldn’t expect the minutes to include any earth-shattering news.
However, Friday might bring more fireworks than the Fourth of July! That’s when the June jobs report hits the tape.
Remember, the May report was a barn-burner, beating expectations for job creation, the unemployment rate, and wage growth.
Treasury yields could spike if this strength continues.
With volatility in the Treasury market somewhat muted, the odds of a market surprise increase.
Happy trading to you,