The Market Today

Treasury Curve Feels First Inversions Since the Great Recession

by Craig Dismuke, Dudley Carter


Quiet Economic Calendar Will Keep Markets Eyeing the Yield Curve: There are no economic reports scheduled for release Tuesday and the only economic-related event will be a press briefing by New York Fed President John Williams at 9 a.m. CT.


Changes for Wednesday: In response to the U.S. national day of mourning for President George H.W. Bush, Wednesday’s economic calendar has essentially been cleared. The ADP employment report, nonfarm productivity and labor costs data, and the Markit and ISM PMIs have all been pushed to Thursday (which already held the factory orders report, household net worth, and three Fedspeakers.) Fed Chair Powell’s testimony to the Joint Economic Committee has been postponed with an alternate date yet to be determined. The Fed’s Beige Book will be released Wednesday afternoon as planned.



Yesterday – Front Half of the Treasury Curve Inverted: Although stocks closed in positive territory Monday, the final levels were well off the early highs. Presidents Trump and Xi agreed over the weekend to a temporary truce on any additional tariffs. The news sparked a relief rally globally that saw Chinese shares gain just under 3% and U.S. futures add to last week’s gains. But the high watermark for U.S. equities was set by the first tick on the tape. The indices gradually declined from there and spent the remainder of the day fluctuating in positive territory. But the Treasury market drew more attention as the long end of the yield curve erased an overnight rise while the front end experienced its first inversions since the Great Recession (see Chart of the Day). After gapping higher by 6 bps overnight to 3.05%, the 10-year yield retreated during the entire U.S. session to finish 1.8 bps lower at 2.97%, the lowest since mid-September. Shorter yields held more of their overnight increase with the 2-year yield settling up 3.5 bps to 2.821% while the 3-year yield added 2.8 bps to 2.827%. The 5-year yield added a smaller 0.5 bps, closing at 2.818%, and below both the 2-year and 3-year yields for the first time since before the Great Recession. The spread between 2s and 10s collapsed 5.3 bps, the most in a day since March, to 14.7 bps, a new low for the cycle.


Overnight – Front-End Treasury Inversion Holds as Markets Rethink Trade Truce: Global markets are a bit more cautious Tuesday after Monday’s strong gains for equities met resistance during U.S trading and a front-end inversion of the Treasury curve gave analysts reason to write worrisome headlines again about a possible economic slowdown. Chinese equities gained modestly Tuesday while the rest of Asia weakened. The Stoxx Europe 600 has pulled back 0.6% and U.S. futures were lower by 0.2% to 0.4%. Global equities rallied Monday after the U.S and China agreed to hold off on any new tariffs for a 90-day period in hopes a significant trade differences can be reconciled. Tuesday’s reversion lower comes as investors attempt to better calibrate for the actual likelihood a deal can be reached in three months, amid a scarcity of any further details. One of Monday’s most popular topics was still en vogue Tuesday as the 2y5y spread and 3y5y spread remained inverted and the 2yr10yr spread continued to tighten. The 2-year yield rose another 1.6 bps to 2.838% this morning as the 10-year yield dipped another 0.4 bps, trimming the spread between the two to an increasingly thin 12.8 bps. Looking at other markets, oil prices were up more than 1.5% Tuesday after a 4% gain to start the week with investors hoping OPEC and friends will announce production cuts at the conclusion of a Thursday meeting.



ISM Manufacturing Bounced Back Unexpectedly with Big Gains in New Orders Index: The ISM’s Manufacturing PMI rose unexpectedly in November back closer in line with its year-to-date average. Economists were expecting a third monthly decline and for the headline index to edge down to its weakest level since April. However, a big recovery in the new orders index and smaller gains for indices tracking inventories, employment, and production helped push the overall PMI up 1.6%-points to 59.3. After dropping noticeably over the last two months to an 18-month low, new orders popped back 4.7 points to the best level since August. The employment index rose 1.6 points to its fourth highest level of 2018. Away from the headline-related components, the biggest underlying change was in the prices paid index, which is considered to be the survey’s inflation indicator. The prices index plummeted nearly 11 points, the most in a month since 2012, to its lowest level June 2017. Talk about tariffs and troubles finding qualified workers continued to be the headwinds most frequently cited by survey respondents.


Weaker-than-Expected Construction Spending: Construction spending was disappointing with the Census Bureau reporting an unexpected decline for October and making negative revisions to activity in both August (from +0.8% to -0.4%) and September (from 0.0% to -0.1%). Activity dipped 0.1% in October instead of realizing the 0.4% bump economists had expected. Softness in the residential category was no surprise, considering the weakness in the other housing reports of late, and combined with weaker nonresidential spending to offset a recovery in spending on public construction projects. The negative revisions to the final two months of last quarter should affect 3Q GDP in its next revision and the miss for October is likely to weigh some on current quarter estimates. From a broader perspective, the persistent decline in private housing activity is evident in the YoY rate while the trend in the other two categories remains more constructive.


Lots of Fed News: There was a good bit of Fedspeak to start the week. Fed Vice Chair Clarida kicked it off with a positive outlook for U.S. economy and a statement that the Fed could operate somewhat above the Fed’s 2-percent, symmetric target. Vice Chair Quarles noted that where the Fed Funds rate “will end up in that range will depend on the data.” New York Fed President Williams didn’t address policy at a conference focused on the Treasury market but Fed Governor Brainard did, saying the labor market is “now at or beyond full employment” and noted inflation is “around target.” Fed President Kashkari spoke to the WSJ and again called for the Fed to “step back and see what the economy presents us. …If the economy is creating 200,000 jobs a month, month after month after month, we cannot be at maximum employment.” After rattling off several risks, he cautioned, “I’m not forecasting a recession, certainly, but I’m not ruling it out.” President Trump’s take on the Fed was back in the news, though the tone was quite different. After repeatedly criticizing the Fed for its insistence on raising rates, Treasury Secretary Mnuchin told CNBC “He liked the speech,” referring to President Trump’s opinion of Powell’s “just below” neutral remark last week that helped the S&P 500 register its best week since 2011.


Congress Set to Extend Spending Authority for Two Weeks: Congress agreed Monday to push back the date on which current funding expires from this weekend until the weekend before Christmas. Per the WSJ, “The House and Senate are expected this week to pass the measure, which would extend the government’s current funding through Dec. 21. Congress has already funded several agencies, including the Defense Department, until October 2019, but seven spending bills are set to expire at 12:01 a.m. Saturday. With no deal in sight, congressional leaders had already been considering a short-term spending patch late last week. But with the House out all week and the Senate facing a shortened schedule because of former President George H.W. Bush’s funeral proceedings, a short-term extension quickly became more necessary. …President Trump said over the weekend that he would sign a short-term spending bill while the negotiations continue.”


ICYMI – November 2018 Monthly Review: Market uncertainty continued in November, with the S&P 500 briefly turning negative for 2018, the 10-year Treasury yield closing below 3% for the first time since mid-September, and the 2s10s spread ending below 20 bps, the lowest since August. Wage growth hit a cycle-high 3.1%, sending the 10-year yield to 3.24%, its highest close since May 2011. However, uncertainty quickly overtook optimism and yields drifted lower for the remainder of the month as a result of equity weakness, geopolitical uncertainty, a bear market from oil, and some softness in the global economic data. Potentially most interesting from a monetary. Combined, these uncertainties likely played a part in Fed Chair Powell shifting his emphasis when describing how accommodative the overnight raise is and the Fed Minutes calling for “flexible policy” beginning in 2019. A possible Fed pause next year lifted stocks back into positive territory for the month but left yields near their lowest levels since September. Click here to view the full recap.

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