Morning Report: Overseas yields hit a record low

Vital Statistics:

 

Last Change
S&P futures 2759.6 9.65
Oil (WTI) 52.61 -0.84
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.13%

 

Stocks are higher this morning on no real news. Bonds and MBS are down.

 

We are seeing lots of articles tying trade to rate cuts. IMO, I think the business press and politicians overestimate the effects of trade sometimes, but there is no doubt that there is a sea change in opinion. The markets are pricing in a 96% chance of a rate cut this year. Only 1 month ago, they were pricing in a 53% chance of no movement at all. Compare the forecast now versus May 3. Amazing how much sentiment has changed. The central tendency is now for 2 rate cuts (although the markets expect the Fed to hold steady at the June meeting in a couple of weeks).

 

fed funds futures

 

Is trade the driver of the change in sentiment? It plays a part, no doubt. But, the yield curve inversion has more to do with general economic malaise especially in Europe. The  German Bund (Germany’s 10 year bond) has hit a record low yield of -21 basis points. This is a big deal, and is the real culprit behind the drop in US Treasury rates. Relative value trading (in other words managers selling Bunds which pay nothing for Treasuries which pay something) is pulling US rates lower, which has inverted the yield curve. An inverted yield curve occurs when short term rates (like the 1 month T-bill) are higher than long term rates like the 10 year. The 1 month T-bill pays 2.35% while the 10 year pays 2.11%. Historically, an inverted yield curve has been a recessionary indicator, but that probably isn’t what is going on right now. I certainly don’t think the Fed imagines a recession is imminent or even a decent possibility – we will get an idea however when they release their economic projections at the June FOMC meeting.  That said, the markets see two rate cuts this year, and the dot plot will be an interesting view.  Strange to think that the Fed tightened to fight nonexistent inflation and will ease to fight a nonexistent recession, but here we are….

 

Home prices rose 1% MOM and 3.6% YOY in April, according to CoreLogic. They do see home price appreciation picking back up over the next year, and are forecasting a 4.7% increase over the next year.

11 Responses

  1. Sitting here in LAX, I am confirmed yet again in my absolute disdain for flying and the airline industry. I’m on an 8am flight from LA to JFK, so I arrive at 6am (to avoid the dreaded LA traffic). At 6:45 I was notified that the flight is delayed until noon. Get on standby for all the flights between 8 and noon, but of course nothing comes of that. By 11am, my flight has been pushed to 12:30, but at a gate that already has a totally different flight that is also delayed, and not scheduled to leave until 12:15. Who do they think they are fooling? At this point I assume my flight is actually never going to go, so I get the last seat on the 3pm flight. Who knows if this one will actually leave, but it seems a better bet than staying on the perpetually delayed flight which, sure enough by noon has been pushed to 1pm. By 12:20 its pushed to 1:40. At 1:30 (10 mins ago) it was pushed to 2:30.

    They still have not officially cancelled the flight, but everyone knows it will never leave. WTF is the matter with these airlines?

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    • Just delayed again until 3pm. It is such a joke.

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      • What about the flight you rebooked to, any info?

        Flying sucks, what airline?

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        • American. They really do suck. Re-booked flight left and arrived on time…..11:30 pm in NY. Ugh. Just finished a late night meal and about to go to bed. The reason I am in NY is a long story that is still in the process of unfolding, so I will fill you in later. (Not work related.)

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        • Amgen owns the patent on Enbrel and would presumably have final say on what kinds of studies Pfizer or anyone else could conduct.

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      • Everyone I know who has flown into New York recently has had problems.

        Conversely, I have zero issues flying south with American or any of the low cost airlines.

        “Who do they think they are fooling?”

        No one, but I expect some sort of government regulations kicks in if they actually cancel the flight so that’s why the charade is maintained.

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        • jnc:

          Everyone I know who has flown into New York recently has had problems.

          It could be that my experiences are overly colored by being NY-centric. My non-international flying experiences have been tied to either NY or Chicago, two of the worst airline destinations, for basically 30 years now. So maybe I am being too harsh. But damn….every time I fly I run into some kind of problem.

          But the cancelled flight was just the capper to the whole week. I wasn’t even supposed to be on a NY flight. I flew into Nashville last Friday where my daughter met me on her drive from Clemson to LA, where she is moving to go to grad school. She and I then drove across the country (I hit 6 new states!) on I-40, arriving Sunday night into LA. The plan was then to move her into her apartment on Monday, and I was to fly back to London on Tuesday morning. But on Monday morning I realized that my sport jacket…with my passport holder in the pocket…was missing. Called the hotel from the last time I remember seeing it, but they claimed not to have it. So I had to switch the London flight to a NY flight, and then try to figure out how to get an expedited passport while I worked in my NY office.

          I have to admit that it was easier than I expected. Of course the scheduled appointments were all booked for days in advance (both in LA and NYC), but they do have a walk-in service in the first hour of business every day, for people without appointments who are travelling in the next 2 weeks. I was advised to arrive at least an hour before the office opened, because there would be a line. Sure enough, I arrived at 6:15 am for a 7:30 opening, and I was 9th in line, and by 7am there were probably 100 people in a line around the block. But once they opened the door, I was in and out before 8am. (I had all the needed documents already filled out and in order.) . The passport was issued within a few hours, and I had it in hand by 2pm. I could have flown tonight if was up for it. (I’m not.) .

          So, against all my other experiences and prejudices, I have to admit that it was the most efficient and well-managed government process I have ever seen. Pleasantly surprised.

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        • Airport comments remind me that I am flying one of my granddaughters to a scitech camp in Thousand Oaks CA in two weeks. But I refuse to fly into LAX if I have any options. The tecchie non-stop early morning flights from Austin to San Jose are always a good bet to be on time, so we are making an occasion out of it. Flying into SJ, driving down the PCH, visiting the Hearst Castle, overnight in Morro Bay, visiting the Mediterranean Arboretum on the Cal Poly SLO campus, and finally to Cal Lutheran in Thousand Oaks for scitech camp.

          Flying out of Burbank back to Austin after depositing the kid. Burbank used to be pretty good – old fashioned, walk on the tarmac. Anyone been there recently?

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        • I went to the Hearst Castle many years ago. Thought it was specatcular. Never flown out of Burbbank, though.

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    • And you’re missing the (small) Baby Trump protest dirigible in the U.K.!

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