Market Snapshot: Stock-market investors rattled by bond market’s ‘warning shot’ — here’s what’s next

The bond market sent a warning, and this time the stock market listened. Investors will be looking for clues in the week ahead that policy makers are listening, too.

The yield on the 10-year U.S. Treasury note on Wednesday briefly traded below the yield on the 2-year note, marking an inversion of the yield curve — a phenomenon seen as an often reliable recession indicator, albeit with an average lag of more than a year. In fact, the 10-year yield has traded below the 3-month T-bill yield since late May — an inversion of that portion of the curve is seen by economists as an even more reliable recession indicator.

Read: 5 things investors need to know about an inverted yield curve

But the latest twist came amid a run of downbeat economic data out of Asia and Europe, as well as an intensifying U.S.-China trade war.

‘Headline warning shot’

The latest inversion doesn’t guarantee doom, but it is “a headline warning shot about what’s been going on over the last few months,” said Joe Mallen, chief investment officer at Helios Asset Management, which manages $16 billion in combined adviser assets, in an interview.

“At a very high level, people are really now genuinely concerned about a recession in the U.S. in the next two years, and I think that’s fair,” he said.

Related: For stocks, ‘buying the dip’ is now likely to be a ‘losing proposition,’ says UBS

It was a volatile week for the stock market. The Dow Jones Industrial Average DJIA, +1.20%  slumped 800 points, or 3.1%, on Wednesday for its biggest one-day percentage fall of 2019, while the S&P 500 SPX, +1.44%  tumbled 2.9% in the inversion-inspired selloff. Equities ended mostly higher Thursday and then reclaimed a sizable chunk of ground Friday, but still ended lower for the week. The S&P 500 saw a 1% weekly decline, while the Dow fell 1.5% and the Nadsaq Composite COMP, +1.67%  was down 0.8%.

The 10-year/2-year measure of the curve ended the week with a small upward slope after Wednesday’s brief inversion. But stock-market investors were also spooked by the size and speed of the rally in Treasurys, a popular haven during periods of uncertainty. Yields, which move the opposite direction of bond prices, fell sharply to multiyear lows or, in the case of the 30-year Treasury bond TMUBMUSD30Y, +0.00%, an all-time low, dipping below 2% for the first time ever before ending the week at 2.001%.

A global story

Of course, the moves in the Treasury market aren’t all — or perhaps even mostly — about the U.S. economy. That speaks to ideas the Treasury rally is overdone, and vulnerable to a pullback that could see yields rebound in the near term.

“The bond market rally is as much a global story as a U.S. one,” said Kit Juckes, global macro strategist at Société Générale, in a Thursday note, observing that weak data in Asia and Europe were the culprits in sparking the Treasury rally that dragged down yields on Wednesday. “But at some point, U.S. data need to justify the fall in U.S. yields, or at least a bigger part of them than recent data have.”

The burgeoning supply of debt around the world that offer negative yields — the entire German government bond yield curve is now in subzero territory — means Treasurys remain attractive, even if their yields are near or at all-time lows.

See: ECB prepared to deliver ‘very strong’ stimulus package, policy maker says

That factor is one reason some investors argue the inversion of the yield curve might not offer as reliable of a signal about the economic outlook as it has in the past. But those external factors might be of limited comfort.

Interview: Central banks ‘racing to the bottom’ means the stock market will do ‘very well’: Mark Mobius

“The bottom line here is that markets fear the U.S. is being sucked into the very low/negative rate vortex that is consuming European sovereign debt,” said Nicholas Colas, co-founder of DataTrek Research, on Thursday. “The signal that sends: Japan-style deflation and eurozone-like economic stagnancy. Not good.”

On the other hand, low Treasury yields should be a positive for stocks, in general, from a valuation perspective. And a record low 30-year bond yield should be a positive for housing.

Focus on the consumer

But the main worry for stock-market investors rests with the U.S. consumer, who remains a pillar of the economy, said Mallen.

Indeed, stronger-than-expected July retail sales data and upbeat results from Walmart Inc. WMT, +0.27%  were credited with stabilizing stocks after Wednesday’s inversion-inspired rout. But heightened recession fears can become a self-fulfilling prophecy if consumers pull back on spending.

All eyes on Jackson Hole

That puts the onus on the Federal Reserve and Chairman Jerome Powell. Fed officials and some of the world’s other top monetary policy makers gather in Jackson Hole, Wyoming, beginning Thursday.

Analysts and investors said the Fed could go a long way toward calming the nerves of consumers as well as investors — though probably not President Donald Trump, who constantly bashes the Fed for what he sees as insufficient speed in cutting rates — if Powell and fellow policy makers engage in some market-oriented hand holding.

Also see: Investors might be disappointed in the Fed’s message from Jackson Hole

A quarter-point rate cut by the Fed in September would likely be a disappointment, Mallen said. A signal that the Fed is prepared to be “a little more aggressive” in light of the recent developments in the yield curve would offer reassurance.

“The comments, or lack thereof, from the Fed are probably going to move the markets one way or the other,” Mallen said.

Filed in: Top News Tags: 

You might like:

Best New Ideas in Money: Read this before using facial-recognition technology or fingerprint scanning Best New Ideas in Money: Read this before using facial-recognition technology or fingerprint scanning
Peter Morici: Here’s what stands in the way of completely self-driving cars Peter Morici: Here’s what stands in the way of completely self-driving cars
Want to trade in your home? Zillow tries a model most often used by car dealers Want to trade in your home? Zillow tries a model most often used by car dealers
Tax Guy: How to reduce the tax hit on a plot of land you plan to develop Tax Guy: How to reduce the tax hit on a plot of land you plan to develop
London Markets: Thomas Cook’s liquidation wipes out travel company worth £1.85 billion just 18 months ago London Markets: Thomas Cook’s liquidation wipes out travel company worth £1.85 billion just 18 months ago
Outside the Box: This one document may have just changed Corporate America forever Outside the Box: This one document may have just changed Corporate America forever
Billington profit up 42%, reports record order book Billington profit up 42%, reports record order book
XLMedia warns on revenue, earnings XLMedia warns on revenue, earnings

Leave a Reply

Submit Comment
© 2019 Stock Investors News. All rights reserved. XHTML / CSS Valid.