In today’s markets, traders clearly believe that risk IS reward…
That’s one reason long-term interest rates are climbing: Investors are absolutely more attracted to equities’ potential upside than to the safety of Treasury bonds.
Bulls think low volatility is a good sign that stocks are poised to go higher. Bears, meanwhile, think markets are disregarding risks and traders are too complacent.
Bond-market volatility has indeed been rather low. But it’s nothing compared to what’s happening in stock markets.
The go-to measure of stock volatility is the Chicago Board Options Exchange Volatility Index (VIX), a composite of S&P 500 Index options.
In the first quarter, the VIX – also commonly referred to as the “fear gauge” – was at its lowest level since 1995.
Stocks closed lower four out five trading days last week, rebounded yesterday, but have drifted down again today.
Benchmark yields have also trended a bit lower, with the 30-year U.S. Treasury bond dipping below 3% and the 10-year U.S. Treasury note slipping to 2.31%.
Recent economic indicators haven’t helped the cause…
Nearly two-thirds of U.S. gross domestic product (GDP) is comprised of consumer spending and retail sales accounts for half of that. Needless to say, retail sales is important to the health of our economy.
April retail sales were expected to rise 0.6%. Analysts expected “core” retail sales – which excludes auto and gas sales – to rise 0.4%. Well, sales only rose 0.4% and 0.3% respectively.
Last Friday’s April consumer inflation report also disappointed. The Consumer Price Index (CPI) did rise 0.2% on the month, in line with expectations. But “core” CPI – which excludes food and energy – was up just 0.1%. And the year-over-year core CPI dipped below the Fed’s 2% target.
Last week, the Fed explained away recent disappointing data (the PCE deflator, GDP, and manufacturing weakness) as “transitory,” or a temporary blip of weakness.
The U.S. Department of Commerce reported on Tuesday morning that housing starts slowed by 2.6% in April compared to March, to an annualized rate of 1.17 million. Analysts expected a run-rate 1.26 million. The April number was, however, 0.7% higher on a year-over-year basis.
The Commerce Dept. also reported that permits for new construction were down 2.5% month over month to 1.23 million in April. Permits were up 5.7% compared to a year ago.
Housing starts and permits tell us a lot about demand for homes and the outlook for new home sales.
New home sales have a ripple effect on our economy because it creates revenue not just for the builder but for businesses that sell appliances, furniture, and other things people fill their homes with and that provide landscaping and other services essential to making and keeping a nice home..
Todays’ data were mixed, but a trend is emerging.
And if it continues, I’m not sure how the central bank can justify its plan to raise its benchmark interest rate two more times in 2017.
We’ll see more data and we’ll get more insight from Fed officials between now and the next time they meet on June 13-14. In fact those chatty folks, altogether, will provide daily speeches between now and Memorial Day. It’ll be interesting to hear how they spin recent disappointing data.
If stocks end up shaking off weak data and move higher, bond yields will follow.
And that bodes very well for our potential profits here in Treasury Profits Accelerator!
I explain exactly why in this week’s special live Q-and-A session with Dent Research readers.
You can watch it and get the inside scoop on how to profit from both positive and negative market surprises, right here.
Editor, Treasury Profits Accelerator