Seesaw.

Seesaw.  Stocks reversed early gains yesterday to close in the red as the bond market challenged the President’s claims.  No trade news left investors debating whether or not a phone call actually came from China over the weekend and ultimately the yeses lost.

 
MY TWO CENTS
 
1.  A specter of things yet to come.  Yesterday’s session summed up the current state of the market in just 6 1/2 hours.  Markets opened higher on continued optimism that trade talks with China are back on track.  Why?  Really, I have no clue.  All of the news reported overnight and here in my note pointed to no real progress in the wake of last Friday’s sneak attack by China followed by a barrage of angry tweets and some tariff hikes.  The President’s claims that China called over the weekend to make up were challenged by Chinese officials who told the Wall Street Journal that they knew nothing of any calls.  By yesterday morning, there was still no proof that a call actually occurred.  Further, it was reported that the Chinese feel that the President has no credibility, making a sweeping deal less likely.  Perhaps stock traders followed my advice not to trade against presidential tweets, despite their substance.  Whatever the case, it was bond traders that finally called Hogwash on the whole affair and began to buy bonds, specifically longer maturity bonds.  When pragmatic, and usually pessimistic, bond traders expect things to be bad in the future, they rush into longer maturity bonds pushing yields down.  This eventually causes the inverted yield curve, which so many have been discussing lately.  Yield curve inversions have been a good predictor of the onset of recessions.  The 3-month / 10-year yield curve, which was the one featured in the original research for its predictability has been inverted except for one day since late May.  That portion of the yield curve closed yesterday out at -52.645 basis points, which is more inverted than it was at the onset of the last recession at which time its low water mark was -38.351 basis points on March 30, 2007.  The 2-year / 10-year yield curve closed out yesterday’s session at -5.331.  That last time that curve was there was also in March of 2007.  To put things into perspective, the Fed started cutting rates later that year in September and the recession officially began in December, 2007.  As with all things in the markets, what happened in the past is not always guaranteed to happen again in the future, but stock traders couldn’t ignore the warning bells and markets traded off in response.
 
2.  On the bright side.  After that dark point above, I thought I should re-emphasize the fact that inverted yield curves do not cause recessions and that economic conditions today are vastly different than back in 2007 when Fed Funds were at 5.25% and the unemployment rate was around 4.5%.  Consumer confidence had fallen from a high of 111.94 to 87.78 by the onset of the recession.  Today, Fed Funds are at 2.25% after last month’s cut, the unemployment rate is at 3.63% (the lowest since 1953), and Consumer Confidence came in yesterday at 135.1 versus last month’s revised up 135.8.  The confident consumer is still pulling the economy, despite the fears of bond traders.
 
THE MARKETS
 
Stocks ended the session down after trading up earlier in the day as hope of some proof that China actually called up US negotiators never materialized causing bond traders to ring the warning bells.  The S&P500 traded down by -0.32%, the Dow Jones Industrial Average pulled back by -0.47%, the Russell 2000 dropped by -1.35% putting it in a precarious technical position, and the NASDAQ Composite Index slipped by -0.34%.  Bonds rose yesterday and 10-year treasury yields fell by -6 basis points to 1.47% and 30-year treasury bond yields fell below 2% to 1.95%.
 
WHAT’S NXT
– EIA US Crude Oil Inventories are expected to show a draw down of -1.94 million barrels.
– The Richmond Fed’s Thomas Barkin and San Francisco Fed President Mary Daly will both speak today.
– The Treasury will auction off $41 billion 5 year notes.
– This morning Coty missed earnings and Tiffany and Co. beat estimates.  After the bell earnings include Williams Sonoma, PVH, and Five Below.
Pleas call me if you have any questions.
Best regards,
Mark

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