Morning Report: The Fed frets the yield curve 8/28/18

Vital Statistics:

       Last    Change
S&P futures 2903 3
Eurostoxx index 386.36 .8
Oil (WTI) 68.91 0.02
10 Year Government Bond Yield 2.87%

30 Year Fixed rate mortgage                              4.58%

Stocks are higher this morning on optimism over trade talks with Mexico. Bonds and MBS are down.

We saw a strong buildup of inventory in July, both at the retail level and the wholesale level. Inventory growth was negative in the second quarter, which depressed GDP growth slightly. This improvement in inventories will provide a boost to the third quarter numbers. Durable goods and autos led the increase, with retail inventories up 0.4% and wholesale inventories up 0.7%.

Redbook reported that same store sales rose 5.1% last week, which was the third fastest pace this year. This bodes well for the back-to-school numbers which are the best predictors of the holiday shopping season. Consumption has been generally strong and these numbers bear that out.

Consumer confidence jumped to 133.4 in August according to the Conference Board. This is the highest level since late 2000.

House prices rose 6.2% in June, according to the Case-Shiller home price index.  Las Vegas, San Francisco, and Seattle reported double-digit increases. The laggards included New York, Chicago and Washington DC which reported low single-digit gains. Las Vegas is one of the fastest growing US cities in terms of population and employment growth, which explains the rise there. Seattle and San Francisco has restricted supply along with foreign demand. On the other side, the Northeast continues to stagnate.

The Urban Institute looked at mortgage denial rates along demographic lines and found that most of the studies that report discrimination overstate denial rates because they fail to take into account incomes and credit scores. While they still found some evidence of racial disparity it is much lower when you correct for these things. Not sure if the difference is statistically significant though. Given that CRA loans are worth more than traditional loans (all things being equal) it is surprising that there is any difference at all.

As the long end of the curve continues to rally, we will have a steady diet of recession prediction stories in the business press. The latest Reuters story cites a Federal Reserve study that suggests the market may be warning of a potential recession: “In light of the evidence on its predictive power for recessions, the recent evolution of the yield curve suggests that recession risk might be rising,” wrote San Francisco Fed research advisers Michael Bauer and Thomas Mertens.

The flattening yield curve provides plenty of fodder for the Wall of Worry, however there are a couple of things to bear in mind. First, the yield curve almost always flattens during a tightening cycle. Take a look at the chart below, and you can see the yield curve flatten as short term rates rise.

tightening cycles

The behavior of the yield curve is 100% normal. Not only that, longer term interest rates are being held artificially low due to the behavior of central bankers throughout the world. The Fed is still buying Treasuries, albeit at a slower pace, while Japanese and European central bankers are pushing down long-term rates, which influences US rates. The signal-to-noise ratio of the yield curve is extremely low right now. Finally, the short Treasury trade is probably the biggest macro bet on the Street right now. Every wiseguy is short, and that means you will sometimes get these rallies for no apparent reason.

22 Responses

    • Dr. Cowbell is getting more shrill in his old age..


    • The thing about the list is that every item on it — starting with Donald Trump’s tax returns — is something that obviously should be investigated, and would have been investigated under any other president.

      Really? I get that he doesn’t like Trump but (a) should every potential foible actually be investigated? If so, isn’t every president vulnerable to endless investigations? And (b) the opposition party doesn’t investigate their own folks like that, no matter how questionable, whether Dem or Rep. At least not since Watergate (except for Mavericks, making a name for themselves with the press, on the Republican side).


      • KW:

        Krugman hasn’t been capable of objective analysis in over a decade (if he ever was), and he is increasingly unhinged.


        • Yeah, you’re right. Just statements like “would have been investigated under any other president” just seems so breathtakingly naive. But you’re right, of course.


    • he Republican-dominated West Virginia legislature impeaches its entire state Supreme Court

      So, they shouldn’t use procedural rules to legally accomplish given goals?

      Or is his argument that all judiciaries should be unaccountable?

      the Republican-dominated North Carolina legislature vengefully passes legislation to curtail the powers of a newly elected Democratic governor

      Vengefully? Again, sounds like there was a vote and powers within the legal framework were used.

      the Republican-dominated North Carolina legislature vengefully passes legislation to curtail the powers of a newly elected Democratic governor

      Because THAT’S never happened before Trump. Christ.

      And probably most disturbing of all is the abject silence of nearly every Republican holding elected office, in the face of the ever-widening gyre of corruption and criminality surrounding this Administration.

      Because THAT’S never happened before, either.

      A year ago it seemed possible that there might be limits to the party’s complicity, that there would come a point where at least a few representatives or senators would say, no more. Now it’s clear that there are no limits: They’ll do whatever it takes to defend Trump and consolidate power.

      I’m pretty sure there have been more Republicans turning on Trump (and bailing out of DC, at the least) than has ever happened with Democrats. So, ignore all that in the service of stumping for “vote for any Democrat” . . . even though there are more Republicans (now former, often) arguing that people need to vote a straight Democrat ticket to defeat the evil of Trumpism.

      The common denominator Krugman sees between what so swiftly happened to Poland and Hungary and what is happening to us is that a huge segment of the American public is being led by the nose with a politics of resentment rooted in white grievance.

      Yeah, that’s the ticket. Not over-taxed grievance or imminent domain grievance or over-regulation grievance or over-run-with-illegal-immigrants grievance or “I like how the economy is doing” lack of grievance.

      The point is that we’re suffering from the same disease — white nationalism run wild

      They need to take back this guys Nobel prize.

      That being said, full disclosure: I won’t be distraught if there is a “blue wave”, and I still don’t particularly like Trump. And unlikely to vote for him next time, either, unless the left forces me to.


      • I love the “white nationalism run wild” line. Why, just yesterday I said that to a fellow caucasian as we perused the stock at the Houston Slave Auction.

        Liked by 1 person

        • It’s unhinged. “White nationalism” is tiny now compared to what it probably was in the 1980s and 1970s, when it was infinitesimal compared to what it was in the 1950s, where it was much smaller that it was when we had Woodrow Wilson, an actual white nationalist, in the Whitehouse and white nationalism was a progressive project.

          I mean, there’s an argument to argue that there’s a non-trivial “nationalist” movement, but “white nationalist”? It’s eye-rolling.

          Which not to say there aren’t white racist out there, or people advancing white identity politics in an echo of minority identity politics . . . but “white nationalism run wild” is not a remotely real thing. It’s like worrying about “unicorns run wild”.


    • As much as I don’t like her as an opportunist who will step all over her allies to hog the limelight, as much as I think of her in that way as an analog to Cruz, as much as I wanted to reject everything she wrote, I have to admit I appreciated quite a bit of it. I believe in the competitive model as the greatest producer and distributor of wealth, as the most likely forum for innovation yet devised, and as the most consonant with a merit based but fluid and open society.

      However, I think Smith got so much of this right – government has to enforce fair weights and measures, break up the trusts [which were the hallmark of the mercantilism that he hated], adopt low or no tariffs with a few exceptions for fledgling industries and the like, and while I am imagining a bunch more nanny from Warren than Smith ever wanted, she is coming from that direction, not from Fabian socialism -UK under Bevan.

      Brent, Smith also was worried about corporate structures as easily “seized” or captured by management. I think it went something like this: profits are not a business decision, they are the result of presenting a good and useful product, kept up to date, and made by skilled labor in combination with the latest machinery. He believed that individual owners, risking their own money, would shepherd investment and fuel innovation, while maintaining skilled labor and equipment, to make and market a good product. He thought that the management of corporations, when not checked, tended to aggregate capital from absentee investors, hire the lowest common denominator employees, and then depend on capturing government to stifle competition and make the management team rich.

      He knew it didn’t always work that way, but it was how the East India Companies worked and they were the worst case examples of public-private mercantilism corruption.

      As a management side lawyer I saw a tendency in the 80s for companies to hire young MBAs to make them more profitable – and the young MBAs always said fire a bunch of your employees. It often turned out to be short sighted advice. The German system does have something to offer here because it has been more efficient to cut hours in many cases than to fire employees. I think it was that employee input into corporate management that found that workaround.

      All this to say that I truly dislike her but this article did not make me think she was crazy.

      Liked by 1 person

      • A Smith quote:

        The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

        Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honor, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

        It is upon this account that joint stock companies for foreign trade have seldom been able to maintain the competition against adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it.

        Liked by 1 person

      • There seems to be two Elizabeth Warren’s, the one on display here and the grandstanding politician.

        Which may well just reflect pandering to the conceits of the audience she is speaking to. You’ll never hear her give the defense of capitalism to the Vox crowd. Then it will be all about reinstating Glass-Stegall, while at the same time telling people who know better like Andrew Sorkin in the NY Times that it wouldn’t have made a difference.


  1. Turns out only 11 out of 235 reported school shootings were proven to have actually happened…

    The obama admin only overstated school shootings by a factor of 20x. How much you wanna bet the SPLC’s reporting of hate crimes is even worse?

    Liked by 1 person

  2. Campus rape is legal again boys!


    • “Weaken” . . . how? By requiring evidence? By presuming innocence rather than guilt? I suppose I’ll had to read the article to find out.


    • KosKids not happy campus rape is legal again.

      As always, the comments are fanfucking tactic!

      Liked by 1 person

      • DeVos previously rescinded Obama-era guidelines on campus sexual assault because they were supposedly unfair to rapists

        Man, the left just hates “presumed innocent”. Stupid legal system. The rules were unfair to any man accused, by anybody, no matter how absurdly.

        The DeVos rules would allow perpetrators to cross-examine their victims

        Ergo, let the accused confront their accusers. Christ, do these people have problems with English?

        Oh, and the accused would get to see the evidence, instead of having the “evidence” for the charges hidden from them and being unable to respond. That sounds fascist!

        Oh, and by the way, “the Trump administration’s new rules will have the force of law and can go into force without an act of Congress, after a public comment period.”

        Were they bitching about that when the Obama admin put out the guidelines originally?

        And you’re right about the comments.

        I will never get over this, that even a rapist is preferable to a woman.

        Including the 41% of women that voted for Trump? What does that say about Clinton? Indeed, much more accurate to say that even a harasser (as far as I know, there’s no evidence that Trump is a rapist) was preferable to Hillary Clinton. She was not an avatar for all women, and whose to say an American Maggie Thatcher wouldn’t have wiped the floor with Trump?

        Also, DeVoss is a woman, but . . . eventually it all just starts to make my head hurt.

        Christ. The comments are gold. What a cesspool of human debris inhabit The Kos.


Be kind, show respect, and all will be right with the world.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: