May 1, 2019
Bond Market Review
‘Great Expectations’ would have been an unlikely outlook for first–quarter U.S. GDP growth. After all, the much– trusted Atlanta GDP–Now forecast kicked off with a .3% estimate on March 1st (with 2 months of the quarter in the books). However, most of those ‘books’ weren’t known at the time as the government shutdown delayed incoming data. Even some Q4 data was delayed until March. In our last report, we said “the Atlanta Fed’s GDP–Now Q1 forecast rose to 2.8% last week on strong retail sales. New York was only 1.37% and St. Louis’s stood at 1.89%.”
That Atlanta forecast seemed optimistic – especially compared to New York and St. Louis. The economic consensus was between those Fed readings at 2.30%. Yet, Q1 GDP kicked of the year at a surprising 3.20% pace. Personal Consumption beat expectations and prices and inflation were below the Fed’s desired targets. Some incoming data is showing continued headwinds and challenges, but for the most part – the numbers look good! Other February data is just now coming in, so Q1 GDP could be revised for better or worse. ADP Employment Change showed private payrolls growing a 9–month high 275K in April versus 180K expected. Friday’s April jobs report could be another in the 200K range! Atlanta’s Q2 GDP–Now forecast opened at 1.3%.
In the BMR (12/20/18) we said the Fed plowed ahead with tightening “contending we were still below ‘neutral’ rates. The Bond Market Review would simply object to that premise as ‘assuming facts not in evidence!’” The BMR (02/25) said: “While the Fed has been searching for neutral, we contended that low global rates and a near–decade of modest inflation might indicate that neutral was not higher – but lower!” On Monday, the Personal Consumption Expenditures data came was reported for February and March. The PCE Deflator is considered the Fed’s favorite inflation indicator, and the latest readings leading into their meeting were tepid. In February, the PCE Deflator rose a modest .10%, cooling the annual pace from 1.40% to 1.30%. The core (ex food & energy) also rose .10% – slowing annual core PCE from 1.80% to 1.70%. In March, the PCE Deflator rose .20% and the annual pace rose from 1.30% to 1.50%. However, core PCE was flat and the year–over–year pace cooled another .10% – from 1.70% to 1.60%. With core PCE so far under the FOMC 2% target, there’s a valid argument that neutral rates are indeed lower! The market–based odds for Fed hikes through early 2020 remain at 0% – while greater than 53% for a cut in December or January (2020). However, a lot can happen between now and then. With the Fed on hold and GDP running better than expected, we could be witnessing that ‘elusive soft landing’ we spoke of in the BMR (04/17).
The widely–expected ‘non–event’ for today’s FOMC interest–rate policy announcement was just that. No change in rates – and few changes to the statement! They noted that “economic activity rose at a solid rate” changing the March 20th text that read “growth of economic activity has slowed from its solid rate in the fourth quarter.” Speaking to those annual PCE inflation rates, the statement said: “On a 12–month basis, overall inflation, and inflation for items other than food and energy, have declined and are running below 2%.” Fed Chair Jerome Powell saw the recent drop in inflation rates as “transitory.” He said the Fed’s current funds target is “appropriate right now.” Those expecting more of a dovish stance were disappointed as Powell said: “We don’t see a strong case for moving in either direction.” The vote was unanimous – as has been every statement decision chaired to date by Powell.
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.
• Stock cycles project lower into May 23rd.
• Bond cycles show yields turning lower from May 6th/7th into a low due May 17th/20th.
Treasuries, Agencies, and MBS
Yields dropped again – falling into our May 1st/3rd window for a low. Yields should turn lower again early next week and trade off into a May 17th/20th trend–change. The U.S. Treasury curve steepened with yields falling 10, 8.5, 6, and 3.5 bps for the 2, 5, 10, and 30–year sectors. Through today, yields rose by 2 and 1 bps at 2 and 5–years. However, they were flat at 10–years and lower by 2 bps at 30–year (twisting the curve a bit flatter). On Monday, the yield curve was the least inverted for 2019 with 5–year yields 2 bps over the 2–year. They’ve spent most of 2019 at a negative spread (which returned today at –.5 bps).
Last week MBS spreads (FNMA 30–year 3.5%) widened by 3 bps. The U.S. Treasury sold $32 billion 7–year notes last Thursday (04/25) at a 2.426% yield. Demand was the lowest this year and the group that includes foreign central banks bought 60.4% of the issue versus 64.5% in March.
04/26/19 Treasury Yield Curve 2-Year: 2.283% 5-Year: 2.289% 10-Year: 2.499% 30-Year: 2.924%
Weekly Yield Change: –.098% –.083% –.062% –.037%
Support: 2.356/ 2.396/ 2.424/ 2.474 2.353/ 2.370/ 2.411/ 2.451 2.568/ 2.592/ 2.613/ 2.6137 2.951/ 2.973/ 2.995/ 3.011%
Targets: 2.315/ 2.277/ 2.238/ 2.204 2.300/ 2.252/ 2.218/ 2.182 2.537/ 2.518/ 2.497/ 2.458 2.907/ 2.885/ 2.865/ 2.845%
Initial Jobless Claims jumped the most since 2017, rising from 193K to 230K. The increase was blamed on a grocery strike and the holidays. Continuing Claims rose 1K to 1,655K. Q1 GDP surprised with 3.20% growth and Personal Consumption rose 1.20%. The GDP Price Index cooled from 1.70% to a .90% increase. Core PCE fell from 1.80% to 1.30% (annual rate). The Q1 Employment Cost Index was flat at .70%. February Personal Income rose .20% and Personal Spending rose .10% (Real Personal Spending was flat). March Personal Income also rose .10% but Personal Spending surged .90%! (Real Spending rose .70%.) April Vehicle Sales slowed from 17.5M to 16.4M (annual pace).
The Conference Board’s Consumer Confidence survey rose from 124.1 to 129.2. Their Present Situation survey improved from 163 to 168.3 and Expectations improved from 98.3 to 103. The University of Michigan surveys swung the other way. Sentiment dropped from 98.4 to 97.2. Current Conditions fell from 113.3 to 112.3 and Expectations dropped from 88.8 to 87.4. Bloomberg Consumer Comfort rose from 60.3 to a 5–week high 60.8. Kansas City Fed Manufacturing Activity dropped from 10 to 5 while Dallas fell from 6.9 to 2. MNI Chicago PMI fell from 58.7 to 52.6. ISM Manufacturing pulled back from 55.3 to a 2–year low 52.8. Prices Paid dropped from 54.3 to 50 and New Orders fell from 57.4 to 51.7 (the weakest since 2016). ISM Employment fell from 57.5 to 52.4. March Durable Goods Orders rose 2.70% and were up .40% ex transportation. Capital Goods (business equipment) Orders rose 1.30% – the most since July!
Metro–home prices rose .20% but slowed annually from 3.51% to 3.00% (in February). The S&P Case–Shiller Home Price Index slowed from 4.22% to a 4.01% annual pace. Pending Home Sales rose 3.80% in March but were off 3.20% versus March 2018. March Construction Spending fell .90%.
Thursday is set for more clues into the April jobs numbers from Challenger Job Cuts and jobless claims data. Also due are Q1 Nonfarm Productivity & Unit Labor Costs, Bloomberg Consumer Comfort, and March Orders for Factories, Durable Goods, and Capital Goods. Friday brings the Advance Goods Trade Balance (March merchandise trade deficit), the service sector outlook (ISM Non–Manufacturing), Wholesale and Retail Inventories, and April payroll data including earnings and the Unemployment and Labor Force Participation Rates. Next Tuesday (05/07) brings March data for JOLTS Job Openings and Consumer Credit. Wednesday follows with MBA Mortgage Applications (which dropped by 4.30% last week). Sometime this week, the releases of Mortgage Delinquencies and MBA Mortgage Foreclosures are expected.
The Dow peaked with our April 24th cycle but retested that high today before falling into the close. Before reversing lower, the S&P made a new high today – and the Nasdaq hit a record high on Monday. Again, until this cycle runs its course, we don’t see an advantage to being long. We would exercise caution until May 23rd – when the next major cycle is due for a low.
Stocks were mixed last week, but mostly because the Dow was slightly lower and the Transports lost ground. The Dow Industrials lost 16.21 points or .06% to 26,543.33. After a downside turn, the Dow is .43% lower this week. The Nasdaq rose 1.85% last week but is 1.19% lower this week. The S&P gained 1.20% but reversed .55% lower for the week (after its new high). The Dow Transports lost .97% and tumbled another 2.02% into today’s close. Bank stocks rose 1.60% – finally recovering their 8.26% loss the week of March 22nd. They were flat into today.
Resistance: Dow: 26,507/ 26,587/ 26,694 /26,800 Nasdaq: 8,151/ 8,176/ 8,221/ 8,265 S&P: 2,935/ 2,942/ 2,949/ 2,955
Support: 26,313/ 26,233/ 26,154/ 26,078 8,062/ 8,017/ 7,972/ 7,935 2,922/ 2,909/ 2,895/ 2,882
Trade talks have resumed with Japan and China. Crude Oil dropped 1.09% last week as President Trump called for lower prices and pushed OPEC to cut costs. Crude had hit a 6–month high last week before the drop. Crude was .47% better this week. Commodities fell 1.32% and dropped another .54% into today. Gold rose 1.02% but was off .05% into today. The U.S. Dollar rose .59% but is .32% lower this week. The Japanese Yen gained .30% and is .18% better this week. The Euro lost .84% but is .40% higher this week. Corn lost 2.02% but rose 2.49% into today. Cotton lost .72% and is off another 1.09% 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.