Tag: george yacik

Mixed Signals

Posted on by George Yacik

In a classic case of the tail wagging the dog, the bond market is signaling that the U.S. economy is headed for a recession, rather than the economy telling the bond market that news, which it doesn’t appear to be doing.

On Wednesday, yields on the benchmark 10-year Treasury note fell below two-year yields for the first time since 2007. “This kind of inversion between short and long-term yields is viewed by many as a strong signal that a recession is likely in the future,” according to the Wall Street Journal. Except, of course, when it doesn’t, and this just may be one of those times. The economy, albeit weaker than it was late last year and earlier this year, doesn’t seem to be close to a recession.

Actually, Treasury yields have been inverted for a while, depending on which spread you look at it. At the same time, yields along the curve have dropped sharply in recent weeks, with some securities dropping to record lows.

For example, on Thursday, the yield on the 30-year bond dropped below 2.0% for the first time ever. That’s down from 3.45% on Halloween. The 10-year yield plunged below 1.60%, down from 3.16% last October 1 and it's lowest level since it hit 1.46% three years ago in July.

Meanwhile, the price of gold has jumped 18% since May to more than $1520 an ounce, its highest level in more than six years. And of course, stocks are down, with the S&P 500 off more than 6% since hitting a record high just a couple of weeks ago.

Why is the market so panicky? Continue reading "Mixed Signals" →

One Lump Or Two?

Posted on by George Yacik

With the financial markets already primed for a 25-basis-point cut at next week’s Federal Reserve monetary policy meeting, the talk has now shifted to the possibility that the Fed may go even further and reduce its benchmark federal funds rate by 50 basis points instead.

That speculation was fueled by New York Fed President John Williams, who exhorted an audience of the Central Bank Research Association in New York last week to “take swift action when faced with adverse economic conditions” and “keep interest rates lower for longer” when reducing rates.

“Don’t keep your powder dry—that is, move more quickly to add monetary stimulus than you otherwise might,” he added, which may have left some listeners wondering what year this was – 2008, when the Great Recession was just beginning, or 2019 when the economy is still growing. Either way, listeners on Wall Street were happy to hear it and immediately pushed stock prices higher.

The New York Fed subsequently walked back Williams’s comments, saying that he didn’t mean to suggest that the Fed was about to double-down on a rate increase next week, downplaying his comments as an “academic speech” and “not about potential policy actions at the upcoming FOMC meeting.”

But Fed Vice Chairman Richard Clarida swiftly echoed Williams’ comments, telling the Fox Business Network, “You don’t wait until the data turns decisively if you can afford to. If you need to [cut rates], you don’t need to wait until things get so bad to have a dramatic series of rate cuts.”

The only difference is that Williams described the economy as “pretty strong” – begging the question why the Fed feels it needs to lower rates at all, whether by 25 or 50 basis points – while Clarida implied that the economy is ready to hurtle over the cliff unless the Fed rides to the rescue.

Along comes Boston Fed president Eric Rosengren with a different take. Continue reading "One Lump Or Two?" →

Promises, Promises

Posted on by George Yacik

Pity poor Jerome Powell. He just can’t seem to stay out of his own way.

For the past several weeks the Federal Reserve chair has been promising – ok, maybe not promising, but strongly “indicating” – that it’s only a matter of time that the Fed will cut interest rates. He’s certainly been grooming the financial markets for such a move, and the markets have duly responded, as the major U.S. equity indexes all jumped more than 7% last month while bond yields plunged.

Now comes last Friday’s jobs report that came in much stronger than most people expected and far stronger than the previous month’s totals. The Labor Department said the economy added 224,000 new jobs in June, well above not only the consensus Street forecast of 165,000 but also the most bullish individual estimate of 205,000. It was also far stronger than May’s total of 72,000, which was actually revised downward by 3,000 from the original figure.

Following May’s underwhelming report, most people seemed to believe that the jobs boom had finally played itself out, and it would be all downhill from here, with a recession looming in the not-too-distant future. And then what do you know, the June report comes out and takes everyone by surprise, not least of all Jay Powell himself. Continue reading "Promises, Promises" →

Lock In Now Before It's Too Late

Posted on by George Yacik

I’ve been shopping for brokered certificates of deposit, and the rates between one-year and five-year CDs aren’t a whole lot different. Rates at my broker range from 2.4% for one-year to 2.65% for five, with two- and three-year rates in between.

My first inclination was to stay short. Why lock up my money for five years when I can get nearly the same rate for one, two, or three years? What if rates go up in the meantime?

Fat chance. Given the Federal Reserve’s past behavior, the odds of that happening are pretty slim, if nonexistent. It may make more sense to lock up your money – if you don’t want to risk it in the stock or bond market – for as long as possible now.

With all of the betting now on the Fed cutting – not raising – interest rates this year, market interest rates are only likely to go down from here, not up. Despite its recent track record of quick monetary policy reversals in the face of market volatility, shifting from a restrictive policy to a more accommodative one – i.e., lower interest rates – just makes the Fed more comfortable. Other than savers – who most people with any influence ignore – everyone loves low rates, and if nothing else the Fed wants to be loved. Continue reading "Lock In Now Before It's Too Late" →

Tonic For The Temper Tantrum

Posted on by George Yacik

One of the many memorable scenes in the 1978 comedy classic Animal House is when a 20-year-old Kevin Bacon tries to tell the crowd at the Faber College alumni parade to “remain calm, all is well!” just before he gets trampled flat by the onrushing mob.

I flashbacked to that this week watching global bond yields sink to their lowest levels in several years even as the overall economy – in the U.S., at least – seems to be in pretty good shape. The yield on the benchmark 10-year U.S. Treasury note fell below 2.22%, its lowest level since September 2017. That put it well below all of the Treasury’s securities that mature in one year or less, meaning you could get a higher yield by putting your money in a one-month T-bill (2.35%) than you could lending your money to the government for 10 years.

Still, that was a lot better yield than you could get overseas, where government bond yields sank even deeper into negative territory. The eurozone benchmark, the 10-year German bund, dropped to negative 17 basis points while the Japanese bond of the same maturity hit negative nine basis points, their lowest levels in nearly three years.

Yet, on that same day, the Conference Board’s U.S. Consumer Confidence Index for May jumped nearly five points to 134.1, its highest point since last November. The index “is now back to levels seen last fall when the index was hovering near 18-year highs,” noted Lynn Franco, the group’s senior director of economic indicators. “Consumers expect the economy to continue growing at a solid pace in the short-term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead.”

Clearly, there’s a serious disconnect between American consumers, who are in a bullish mood – not surprising, given the unemployment rate of 3.6% – and the bond market, which has pushed yields on the safest instruments down to levels you would expect in a recession. Who’s right? Continue reading "Tonic For The Temper Tantrum" →