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Could the Yield Curve Be Wrong This Time?

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What’s in Today’s Report:

  • Could the Yield Curve Be Wrong This Time?
  • Chart: 10s-2s Yield Curve Spread Near Multi-Decade Lows

Futures are lower this morning as economic data confirmed weakness in the global manufacturing sector while the RBA unexpectedly paused their rate hiking cycle at the conclusion of their latest meeting overnight.

Economically, China’s Manufacturing PMI fell to a contractionary reading of 49.2 vs. (E) 50.1 while the Eurozone PMI met estimates at a very weak reading of 42.7, underscoring the challenges facing the global manufacturing sector.

Looking into today’s session, there are several economic reports to watch: ISM Manufacturing Index (E: 46.5), Construction Spending (E: 0.6%), and JOLTS (E: 9.650 million). Investors will be looking for better than feared manufacturing data in the U.S. and signs that the domestic labor market is softening but not collapsing.

Earnings season also continues with multiple notable companies reporting quarterly results today including: UBER ($0.00), PFE ($0.57), CAT ($4.51), and JBLU ($0.40) before the open and AMD ($0.57), SBUX ($0.95), and AIG ($1.54) after the close.

Tom Esaye Quoted in Market Watch on July 17th, 2023

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As the Dow hits 2023 high, one of the oldest stock-market forecasting tools is making a comeback

Despite numerous warning signals from cross asset analysis, including the still deeply inverted yield curve, Dow Theory, which is one of the most historically accurate strategies to identify the primary trend in the stock market, is now saying the path of least resistance is higher for the first time since April of 2022, said Tom Essaye, founder of Sevens Report Research and a former Merrill Lynch trader, in a Monday note to clients. Click here to read the full article.

Sevens Report Co-Editor Tyler Richey Quoted in MarketWatch on April 17th, 2023

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Oil futures finish lower as traders eye prospects for energy demand

Oil futures finished with a loss on Monday, with traders weighing the prospects for energy demand. A “shockingly strong” Empire State Manufacturing Index reading Monday helped to live the odds of an interest-rate hike by the Federal Reserve in May, said Tyler Richey, co-editor at Sevens Report Research. Click here to read the full article.

Is the Yield Curve Signaling an Imminent Recession?

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What’s in Today’s Report:

  • Is the Yield Curve Clearly Signaling an Imminent Recession?
  • Chart: Oil Testing Critical Support

Stock futures are sharply lower with global shares as much of yesterday’s rally is being given back amid a resurgence in growth concerns ahead of Powell’s testimony today.

U.K. CPI met estimates at 9.1% but Input PPI jumped 22.1% vs. (E) 19.4% stoking fears that central banks will have to be even more aggressive to get inflation under control in the months ahead.

There are no notable economic reports today but there are multiple Fed speakers: Barkin (9:00 a.m. & 12:00 p.m. ET), Powell (9:30 a.m. ET), Evans (12:55 p.m. ET), and Harker (1:30 p.m. ET).

Then in the afternoon, there is a 20-Yr Treasury Bond auction at 1:00 p.m. ET that could move yields and impact equity markets.

Bottom line, the focus will be on Powell’s testimony before the House this morning as there has been a resurgence in concerns about global growth in the face of the latest broad shift to more aggressive central bank policy in response to sticky and elevated inflation pressures globally. And if Powell is seen as getting more hawkish, or the market shows signs of losing confidence in the Fed’s policy plans, we could potentially see stocks test the 2022 lows.

What Retail Earnings Say About Consumer Spending

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What’s in Today’s Report:

  • What Walmart and Home Depot Earnings Say About Consumer Spending
  • Chart: Shorter Duration Yield Curves May Be Peaking
  • Economic Takeaways: Retail Sales and Industrial Production

Global markets are mostly stable this morning with bond yields little changed and stock futures modestly lower as traders digest Powell’s commentary and fresh inflation data.

U.K. CPI jumped 2.0% in April to hit a 40 year high of 9.0%, slightly below estimates of 9.1% but Eurozone HICP was more encouraging as it held steady at 7.4% vs. (E) 7.5% suggesting inflation pressures in the broader Eurozone may be peaking.

Looking into today’s session we will get one economic report in the morning: Housing Starts (E: 1.766M) and one Fed speaker at the close: Harker (4:00 p.m. ET) but neither should move markets.

There is a 20-Yr Treasury Bond auction at 1:00 p.m. ET that could move yields and impact equity trading, especially on a sector level but it would take a decent surprise in the outcome of the auction.

Finally, we will get more retail earnings this morning with TGT ($3.00), LOW ($3.24) and TJX ($0.60) reporting before the bell and one notable tech earnings release after the close: CSCO ($0.86).

Bottom line, the market largely looked past Powell’s slightly more hawkish comments yesterday and instead focused on solid economic data while shrugging off soft retailer earnings. And if we see more disappointing retail earnings this morning (TGT just released terrible results and guidance and is down 17% in pre-market trading) then the market may pullback amid rising concerns about the health of the U.S. consumer given the growing headwind of inflation.

A Critical Time for the Yield Curve

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What’s in Today’s Report:

  • A Critical Time for 10s-2s
  • Empire State Manufacturing PMI Takeaways

There is a clear risk-on tone in markets this morning with stock futures sharply higher amid optimism that China will ease regulation on the tech sector (the Hang Seng rallied 3%) while economic data surprised to the upside.

Economically, the Q1 Eurozone GDP Flash came in at 5.1% vs. (E) 5.0% Y/Y which helped ease recently elevated concerns about global growth which may have been overdone.

Looking into today’s session, focus will be on economic data early with several reports due to be released including: Retail Sales (E: 0.7%), Industrial Production (E: 0.4%), Housing Market Index (E: 75). Investors will be looking for solid data that helps further ease fears about a potential slowdown in the economy.

There are also multiple Fed speakers today: Harker (9:15 a.m. ET), Powell (2:00 p.m. ET), Mester (2:30 p.m. ET), and Evans (6:45 p.m. ET). Powell will be the main focus but the market will want to see officials collectively strike a less hawkish tone if we are going to see these early gains in equities hold.

Bottom line, the overnight rally in equity futures came on very light volume and it should not be surprising to see the market gravitate back towards yesterday’s levels this morning as investors assess the new economic data and slew of Fed speakers. But with good news flow, we could see the relief rally resume today.

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Yield Curve Update

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What’s in Today’s Report:

  • Yield Curve Update (Are Recession Risks Rising?)
  • Why European Energy Companies Buying Gas in Rubles Matters to Stocks
  • Q1 GDP – Not as Bad as It Looks

Futures are moderately lower following underwhelming earnings and guidance from AMZN and AAPL.

AMZN results underwhelmed the street (especially margins) while APPL beat earnings but had cautious guidance for Q2 based on supply chain issues.

Economically, inflation pressures remained high as core EU HICP (their CPI) rose 3.5% yoy vs. (E) 3.1%.

Today focus will be on inflation as we get two important readings: Core PCE Price Index (E: 0.3%, 5.3%) and the Employment Cost Index (E: 1.1%).  Markets will want to see the actual numbers miss estimates, and in doing so further hint at a peak of inflation.  If the opposite happens (the numbers are hotter than estimates) that will further pressure stocks.  We also get Consumer Sentiment (E: 65.6) and the Inflation Expectations sub-index will be watched closely.

On the earnings front, some important results today include:  XOM ( $2.25), CVX ($3.44), CL ($0.74).

Tom Essaye Quoted in Market Watch on April 18th, 2022

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10-year yield highest since late 2018 as Treasury selloff continues

Looking at the yield curve, the 10s-2s spread continued to widen out and is now smack in the middle of the 30-40 basis point resistance range, and we think that’s a critical resistance level…said Tom Essaye, founder of Sevens Report Research, in a note. Click here to read the full article.

Updated Jobs Report Preview

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What’s in Today’s Report:

  • Jobs Report Preview (Slightly Updated)

Futures are modestly higher ahead of today’s jobs report as markets bounce back from Thursday’s late-day selloff.

Markets dropped into the close yesterday but that was driven by quarter-end re-positioning and rebalancing, not be any news, so it’s being partially unwound this morning.

Economic data underwhelmed as the EU and UK March Manufacturing PMIs both slightly missed estimates.

Today’s focus will be on the Jobs Report and expectations are as follows: Job Adds:  490K, UE Rate:  3.7%, Wages: 0.4% m/m, 5.5% y/y).  The estimates for the jobs report have crept higher the past two days so we slightly revised our “Too Hot” and “Just Right” ranges for today’s jobs report, and they are included inside today’s Sevens Report.

Outside of the jobs report, we also get the ISM Manufacturing PMI (E: 58.6), and markets will want to see stability in the data above all else (so no big miss vs. expectations).  We also get one Fed speaker, Evans at 9:05 a.m. ET, but he shouldn’t move markets.

For Sevens Report Quarterly Letter subscribers, the Q1 ’22 Quarterly Letter and compliance back up will be delivered via email around mid-day today.  If you are not a subscriber and are interested in the letter, please click this link to learn more.

Finally, today is April Fools Day, so be extra wary of any preposterous declarations from your family, friends, or colleagues.

Is a Yield Curve Inversion Different This Time?

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What’s in Today’s Report:

  • Is A Yield Curve Inversion Different This Time?

Futures are moderately higher on growing optimism for a sooner than later cease-fire in the Russia/Ukraine war.

Reuters quoted Putin as stating there had been “certain positive shifts” in the negotiations for a cease-fire, although the fighting continued and an imminent cease-fire is unlikely.

Economic data was sparse but generally fine.  German CPI met expectations at 5.1% yoy while UK Industrial Production rose 0.7% vs. (E) 0.1%.

Today there is only one economic report, Consumer Sentiment (E: 61.7), and the inflation expectations index within the report will be important because if five-year inflation expectations move sharply above 3%, that will get the Fed’s attention and possibly make them more hawkish.

Outside of that report, focus will remain on Russia/Ukraine and if we get any additional hints at a cease-fire, it will extend this morning rally.