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February 13, 2020  #912

Bond Market Review

The Inability to Lose?

The Bond Market Review is a publication written by the veteran financial analyst, Doug Ingram with in-depth market commentary. Writing from a macro perspective, Ingram considers politics, Federal Reserve actions, consumer confidence, changes in GDP, equities performance, and other domestic and internationally relevant market factors.

How safe is safe? Few of us would be cavalier or careless if we knew we were near someone that was known to

have the coronavirus. There are a few experts that don’t get much airplay – but they think the virus could continue

into 2021 and that up to 2/3 of the global population could be affected. Nevertheless, we’re willing to throw money

at a potentially ‘infected’ market. We’re conditioned to believe that stocks always come back – no matter what news

or magnitude of correction. Why? Because they always have – so far.

The BMR still has a Dow target zone of 29,708 to 29,928, and we’ll continue to provide our cycle work – which

argues for a more important stock market top near April 15th after a low near March 3rd. Fundamentally, why

wouldn’t stocks continue to rise – given a continuing assist by global central banks? It may be more than prudent

to exercise a little caution; one rarely knows when the party will unceremoniously end. We’re not alarmists, but

sometimes pragmatism must rule over nonchalance.

Clearly, the fundamentals don’t stop with cheap and over–abundant central bank money. The Bond Market Review

wrote about a slump in Germany last week. Don’t make the mistake of assuming the U.S. can operate in a vacuum!

This week, December data showed Eurozone industrial output tumbling 2.1% – the most in nearly 4 years. Japan’s

economy probably had its largest contraction since 2014 and neither seems to be making any progress with

inflation. The rest of the globe aside, those conditions were there before the Coronavirus was detected in early

January and then accelerated to outpace SARS. They were there before cruise ships and regions were quarantined;

before cases started springing up across the globe; before recent news showing that infections have been greatly

understated; before the U.K. ‘Brexited’ the EU; before a production zone in China the size of Sweden shut down

production to try to contain the virus; and before a locust plague of biblical proportions threatened great famine in


Looking Ahead

• Equity cycles show a downturn from a trend–change near February 12th into a low near March 2nd.

• Bond cycles show yields turning down again from a high near February 11th into a low near the 21st.

Systematic Inflation Anxiety

Are things really better than they seem? Despite some foreboding news, the Fed is upbeat but concerned that inflation just won’t cooperate. FRB San Francisco President Mary Daly said: “We need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target in today’s economic environment.” The problem is the symmetry of inflation indicators is wrapping around levels well below 2%! In a global ‘Japanification’, price pressures are failing. In the fourth quarter of 2019, Fed members said the U.S. was in “a good place.” In the BMR (01/10/20), we said: “FRB New York president John Williams upped the praise to ‘a very good place.’” This week, Williams said his baseline outlook is now “pretty darn good.” 

He, like others, is concerned about the impact of the virus on China’s growth. However, we see it as a global issue! The Americas, the EU, Japan, and India are not immune! Powell thinks the biggest challenge to the financial system is the “transition from Libor” to SOFR (and other nation’s short equivalents). The New York Fed will begin to publish 30, 90, and 180–day Average SOFR rates on March 2nd. The ‘Secured Overnight Financing Rate’ will be the new index of choice for short–term floating rate securities and loans. Recent repo–market imbalances and rate spikes have risen concern about volatility in the new indexes, but Libor had been plagued by fraudulent price-fixing – and the new indexes are intended to be far more transparent.

Fed Chair Jerome Powell said the FOMC might not have the ‘ammo’ to stave off the next recession. This week, he told the House Financial Services Committee that low interest rates would make it “important for fiscal policy to support the economy if it weakens.” Mary Daly also said: “With monetary policy facing its own limits, fiscal policy will need to play a larger role in smoothing through economic shocks.” Congress probably laughed at the idea and began discussions on pay hikes for themselves. That might be their way to help spur inflation! We are not alone in seeing Congress as singularly obsessed with removing the President. Sound fiscal policy doesn’t even sound possible. To that end, the U.S. Treasury had a $32.593 billion 9–year high January shortfall – placing fiscal 2020 25.4% ahead of 2019’s deficit pace, and well on the way to exceeding $1 trillion and possibly the largest annual budget gap since 2011. The national debt has risen above $23 trillion and consumers are determined to mirror the government – with personal debt rising above $14 trillion for the first time!

Treasuries, Agencies, and MBS

With inept fiscal policy the more likely (and continuing) outcome, and a focus on the impact of the Wuhan Virus and

a slump in global manufacturing ruling the news, bond yields and stock prices will increase in volatility. The BMR is

even more convinced that the Fed will cut rates in 2020! Hawks are becoming an endangered species as downside

risk is prevalent. Our cycles still indicate a drop in yields into February 21st/24th, where we would consider taking

profits and adding to portfolio hedges. Last week, Treasuries relinquished about half of their huge rally that took

place into the end of January with yields rising by 8.5, 9, 7.5, and 5 bps for the 2, 5, 10, and 30–year sectors. Yields

were again higher into today, rising by 4.5, 4, 3.5, and 2.5 bps for those sectors. The ‘pretty darn good’ data for the

U.S. remains in place for now, with the Atlanta Fed’s GDP–Now forecast for Q1 2020 at 2.4% – though falling from

last week’s 2.9%. Most Americans see the U.S. as healthy and the virus as a China–centric issue – given the strong

U.S. Dollar and our stocks at record highs. It’s said that when America sneezes that the world catches a cold. What

if that trend reverses?

Mortgage refis surged to a 6–year high as low rates and low unemployment spurred applications. The weekly surge

in volume of 5% was the best since June 2013. Refinancings were 65.5% of total applications. Stats were also

moving in the right direction. Mortgage Delinquencies for Q4 2019 slowed from 3.97% to a 3.77% (annual pace).

MBA Mortgage Foreclosures dropped from .84% to .78%.

The yield curve is still inverted and the 2 to 10–year spread is the lowest since early December. Bonds remain

skeptical of global conditions. Last week, MBS spreads (FNMA 30–year 2.5%) narrowed by 6 bps as Treasuries

gave back some gains. On Tuesday, the U.S. Treasury sold $38 billion 3–year notes at 1.394%. That was the lowest

auction yield since November 2016 and demand improved to the January offering. The buying group that includes

foreign central banks accounted for 43.9% of the issue versus 47.5% in January. Wednesday’s 10–year note

brought 1.622% for $27 billion in supply. Demand was the highest since March 2019. Foreign buying rose to 61.3%

versus 55.2% of January’s offering. Today’s 30–year auction brought a record–low 2.061% for $19 billion bonds.

Demand fell to a 3–month low and foreign buying dropped from 63.0% in January to 61.5% of this auction.


Americans went wild with credit in December – spending $22.1 billion versus $15 billion expected, as debt rose by

the most since 1998. Household debt rose by $601 billion in Q4 2019 to top $14 trillion for the first time. Congress

taught us well. We laugh at fiscal policy just like they do! While Bloomberg Consumer Comfort fell from 66.5 to a 5–

week low 65.7, NFIB Small Business Optimism rose from 102.7 to 104.3 – for its 3rd gain in the past 4 months.

Expectations for sales were the highest since last May and the main concern for small businesses was finding

qualified workers. Initial Jobless Claims rose from 203K to 205K and Continuing Claims dropped from 1,759K to

1,698K. Job openings fell to a 2–year low in December, dropping from 6.787M to 6.423 million. With the economy

beyond the level the Fed has considered ‘full employment’, there are probably some diminishing returns. The

Bureau of Labor Statistics shows only 5.892 million unemployed even after the increase in labor force participation

to the highest level (63.4%) since June 2013 (versus those 6.423 million openings).

Consumer Prices rose .10% in January, quickening the annual CPI pace from 2.30% to 2.50%. Excluding food & energy,

CPI was .20% higher – leaving the annual core pace at 2.30%. Real Average Hourly Earnings were up .60% versus

last year, dropping from .70% in December. However, Real Average Weekly Earnings were unchanged.

Friday is set for January Retail Sales, Import Prices, Industrial Production, Capacity Utilization, the University of

Michigan sentiment surveys, December Business Inventories, and various potential complications should you forget

you Valentine. U.S. markets will be closed on Monday (02/17) for the President’s Day/Washington’s Birthday federal

holiday. Next Tuesday (02/18) brings Empire Manufacturing, homebuilder outlook (NAHB Housing Market Index),

and net foreign Treasury operations (Treasury International Capital Flows) for December. Wednesday follows with

MBA Mortgage Applications (which rose 1.10% last week), January Building Permits & Housing Starts, Producer

Prices (January PPI), and the FOMC minutes from their meeting that concluded on January 29th.


After falling for the last 2 weeks of January in a move that seemed to indicate a larger correction was on the way,

stocks turned and accelerated to new highs. Though the mid–caps and NYSE stocks are lagging, and banks and

the Dow Transports have more ground to make up, most indexes broke records once again.

Our equity cycles pointed to a rise from February 4th into the 12th. That rally came in as forecast, and the markets

made a high on Wednesday. The cycles now point lower into March 2nd.

The Dow Industrials rallied 846.48 points or 3.00% last week to 29,102.51 – despite losing 277 points on Friday

(02/07)! They are 1.10% higher this week, after having risen almost 1,500 points or 4.99% versus the low on January

31st. The Nasdaq gained 4.04% last week and is 2.01% higher this week. The S&P gained 3.17% and is 1.39%

better this week. The Dow Transports rose 2.75% and added 1.26% into today. Bank stocks rallied 3.74% and

added another .82% through today.

Other Markets

Crude Oil fell 2.40% last week but is 2.19% higher this week. Our cycles still call for a rally into February 21st.

Commodities fell .11% but have risen 1.27% this week. Gold lost .90% but is .41% better this week. The U.S. Dollar

surged 1.40% last week and is .39% higher this week. The Japanese Yen tumbled 1.29% and is .06% lower this

week. The Euro lost 1.33% and extended that loss another .96% through today. In 2018 the Euro was trading at

1.255 to the Dollar and had been at 1.600 in 2008. It fell to 1.084 today – nearing parity. It’s a great time to travel –

to Europe that is! Corn rose .59% but lost 1.04% through today. Cotton gained .37% and is unchanged this week.

Banes Capital Management, LLC (BCM) has been granted permission by the author, Doug Ingram, to distribute this market commentary (MC). All views, opinions, and estimates included are his as of this date and are subject to change without notice. Commerce Street Capital Management (CSCM) has the marketing distribution rights to the BMR. Mr. Ingram's views, opinions, and estimates are not necessarily those of CSCM or BCM and there is no implied endorsement by CSCM or BCM of any information contained within this MC (which may in fact directly conflict with those being published and distributed by CSCM or BCM, whether or not contemporaneous). In the event of such conflict, neither CSCM nor BCM are under any obligation to identify to you any such conflicts. This MC is for informational purposes only and does not constitute a solicitation or offer to buy or sell any securities, futures, options, foreign exchange or any other financial instrument and/or to provide any investment advice and/or service. Although the information presented has been obtained from sources believed to be reliable, we cannot guarantee or assume any responsibility for the accuracy or completeness of the information shown herein.

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