Upside Downside

Upside downside.  On Friday, stocks sold off as Eurozone manufacturing slumped and the US Treasury yield curve inverted sparking recession fears.  The market received a double dose of bad medicine on Friday causing equity traders indigestion while bonds rallied.


1)  The yield curve inverted on Friday.  The difference between yields of the 3 month T-bill and the 10 year treasury note became negative on Friday which is referred to as a curve inversion.  The 3month/10year yield curve is the most accurate predictor of recession only missing once ever in the 1960’s.  The last time this curve inverted was in 2007, about a year prior to the financial crisis.  Stock traders did not take the event lightly, selling off on the session.

2)  Treasuries continue to rally.  Since the Fed released its dovish results last Wednesday, bonds have been going up causing yields to drop.  When bond traders are worried about the economy in coming years, they expect the Fed to lower rates and do not expect to need higher yields to counter inflation. The result is bond buying which lowers yields to maturity.  The aggressive buying of longer maturities is the principal cause of the 3month/10year yield curve inversion as well as the 2year/10year yield curve hitting its flattest inter-session level since 2007, though it still remains positive.

3) US Manufacturing continues its slowdown and Eurozone manufacturing is contracting in Germany. On Friday, Markit’s US Manufacturing PMI slipped to 52.5 from last month’s 53 missing expectations which were expected to show an increase.  The situation appeared even worse for the EU as a flash manufacturing PMI for Germany slipped below 50 indicating a contraction.  The contraction contributed to a Eurozone flash PMI hitting a 71 month low.

4)  No collusion.  The Mueller report exonerated President Trump, finding no evidence that he colluded with Russia in his 2017 election win.  The report did, however fall short of clearing him on obstruction of justice.  A justice department summary released to lawmakers and the public suggest that there is insufficient evidence to pursue legal action against the President.  The release and subsequent summary has many congressional operatives on both sides of the aisle calling for the release of the full report.  Though it is not at all relevant to financial markets, political turmoil can add some volatility, if not distraction.


Stock markets were pummeled on Friday as traders were hit with bad manufacturing data out of Europe and later in the session as the yield curve inverted, traders headed for the exits as recession fears were renewed.  The S&P500 closed off by -1.9%, the Dow Jones Industrial Average slipped by -1.8%, the Russell 2000 traded down by -3.62%, and the NASDAQ 100 fell by -2.23%.  Though the banking sector has been slipping since the Fed announcement, it was the materials sector which performed the worst on Friday as materials producers are typically the most sensitive to economic cycles.  The VIX Volatility Index spiked up by +2.85% on Friday but fell short of closing above the magical 18 level.  All stock indexes closed right on key support levels showing that technical analysis is real (see charts 4, 6, 7, and 8 in my attached daily chartbook).  Friday’s market action in bonds was no less exciting with the yield curve inverting between 3month and 10 year maturities.  The aggregate bond market rose for a third day in a row with ten year treasuries closing at 2.43% leaving the 2/10 yield curve at +11 basis points.


Today is a light release day with only the Chicago Fed National Activity Index which is expected to come in at -0.38% versus last month’s -0.43%.  Later this morning we will hear from the Dallas Fed and their Manufacturing Index which tracks Texas manufacturing.  The number is expected to come in at 9.0 versus last months reading of 13.1.  Today’s markets will contemplate the yield curve’s ability to forecast a recession and over-analyze the Mueller report, the former being a far more formidable market driver. Apple is expected to unveil a video streaming service to compete with the likes of Netflix. Redhat amongst others, will release its earnings results after the close.


We have two housing sector indicators tomorrow and Friday which will be of interest because the sector continues to show signs of weakness and is looked at as somewhat of an early recession indicator.  We will hear from the Conference Board and Michigan tomorrow and Friday, respectively, regarding consumer sentiment.  These remain critical numbers as they reflect consumer behavior which is the single largest driver of economic activity.  Later in the week we will get GDP figures which are expected to show a quarter over quarter annualized growth of +2.3% which will be watched closely by traders.  On Friday we will get the Personal Consumption and Expenditures (PCE) deflator as well as reads on personal income and spending.  These numbers are the ones that the Fed relies on most as an indicator of inflation.  We still have some earnings releases this week which can be factors in the market.  Please refer to the attached weekly economic and earnings calendars for details (I highlight the numbers to watch in the spreadsheets). This week, the US Treasury will auction off bills and notes at some very low yields and the auction results could certainly impact the bond markets, which as we saw last Friday, cannot be taken lightly by stock investors.

daily chartbook 2019-03-25

earnings releases 3_25

econ numbers 3_25


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