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Did the Yield Curve Actually Invert?

What’s in Today’s Report:

  • Why Italian Political Drama Matters to You
  • Did the Yield Curve Actually Invert? Only Sort Of

Futures are solidly higher this morning, rising in sympathy with EU shares as Italian political concerns ease while a German Bond auction was unexpectedly weak, both of which are helping bolster stocks.

In Italy, odds of a coalition government being formed are rising materially, reducing fears and general uncertainties surrounding new elections this fall.

Economic data was thin o/n however there was a soft 30-Year Bond auction in Germany this morning which is helping yields rise and fueling general risk-on money flows.

After a choppy start to the trading week, the list of market catalysts picks up today as there is one economic report: Existing Home Sales (E: 5.380M) but investors will be primarily focused on the July FOMC Meeting Minutes (2:00 p.m. ET).

If the Minutes release is another “hawkish disappointment” like the announcement and Powell’s press conference were in late July, we could see another wave of volatility as investors’ dovish hopes are elevated going into the Jackson Hole Economic Symposium later this week.

Tom Essaye Quoted in Benzinga on August 14, 2019

“So, while the inversion is certainly a disconcerting signal over the medium and longer-term, it’s not a signal to necessarily ‘sell now,’ because a lot can happen between now and six months or more…” wrote Tom Essaye. Click here to read the full article.

Stock Market

Tom Essaye Quoted in CNBC on August 15, 2019

“The yield curve inverted which created a temporary ‘pile on’ effect in the bond markets. We have absolutely not seen what we wanted to out of the Fed. We had hoped for a rally in the 10-year yield…” wrote Tom Essaye of the Sevens Report. Click here to read the full article.

Graph

 

Tom Essaye Quoted in Diario Financiero on August 14, 2019

“Historically speaking the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere…” said Tom Essaye in a note on Wednesday. Click here to read the full article.

Stock trader

Tom Essaye Quoted in Vanity Fair on August 14, 2019

“Historically speaking the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere from 6 to 18 months from today…” said Tom Essaye in a note on Wednesday. Click here to read the full article.

Trump on a Fire Truck

Tom Essaye Quoted in CNBC on August 14, 2019

“Historically speaking the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere from six-to-18 months from today which will…” said Tom Essaye in a note on Wednesday. Click here to read the full article.

Yield Curve Graph

The Yield Curve Just Inverted

What’s in Today’s Report:

  • The Yield Curve Just Inverted (Chart)
  • Did the Tariff News End the Pullback?

Futures are sharply lower as investors digest historical moves in the bond market amid disappointing economic data.

The 10s-2s yield spreads in the U.S. and U.K. inverted for the first time since the financial crisis while the 30-Yr Bond yield hit fresh lows, further stoking fears of a looming recession.

Chinese Industrial Production (4.8% vs. E: 5.7%), and Retail Sales (7.6% vs. E: 8.5%) both missed expectations as did Eurozone Industrial Production (-2.6% vs. E: -1.5%), adding to the downside pressure on global equities this morning.

Today, there is one second-tiered economic report: Import and Export Prices (E: -0.1%, -0.1%) but because it can offer insight on inflation trends, the release could potentially move markets, as if it runs hot, it could further invert the 10s-2s yield curve spread which is one of the key factors weighing on markets today.

To that point, investors will be closely focused on the bond markets today as the historic inversion of the 10s-2s spread and the drop to new lows for the 30-year yield will likely weigh on risk assets as the odds of a looming recession just increased significantly.

Key Levels To Watch in the Yield Curve

What’s in Today’s Report:

  • Signals from the “Smart Market” – Good, Bad, and Ugly Scenarios

Stock futures are flat to slightly higher this morning as investors continue to digest mixed earnings reports, incremental progress between the U.S. and China on trade, and yesterday’s very dovish Fed chatter.

U.S. and Chinese officials held phone conversations last night and it appears more face-to-face meetings are likely in the near term, underscored by a near 2% rally in copper this morning.

Looking into today’s session, there is one economic report to watch: Consumer Sentiment (E: 98.6) and two Fed officials are scheduled to speak: Bullard (11:05 a.m. ET) and Rosengren (4:30 p.m. ET).

Earnings will remain in focus as there are several notable companies releasing Q2 results before the bell: BLK ($6.52), KSU ($1.61), AXP ($2.05), and SYF ($0.96), but yesterday’s rally was all about dovish Fed expectations so investors will be watching for any further clues as to whether the Fed will cut by 25 or 50 basis points at the July FOMC meeting.

Digging Deeper into the Yield Curve

What’s in Today’s Report:

  • Digging Deeper into the Yield Curve

S&P futures are rebounding solidly this morning after Secretary Mnuchin reiterated that a U.S.-China trade deal is 90% complete while oil prices surge ahead of weekly data.

WTI crude oil futures are up nearly 2% after the API reported a weekly supply draw of over 7M bbls late on Tuesday which nearly tripled expectations (-2.6M bbls).

Economically, the German GfK Consumer Climate headline fell to 9.8 vs. (E) 10.0 in July, underscoring investor concerns about the EU economy.

After Mnuchin’s comments this morning, market focus has returned to the trade war and investors will be looking for any additional commentary out of Washington regarding the upcoming meeting between Trump and Xi or any other details on trade.

There are no Fed speakers today but there are two economic reports to watch that could potentially move markets, especially given the less dovish Fed speak yesterday: Durable Goods Orders (E: -0.1%) and International Trade in Goods (E: -$71.5B).

Bull Steepening (Not Necessarily Good for Stocks)

What’s in Today’s Report:

  • The Yield Curve Is Steepening, That’s Good for Stocks Right? (Not Necessarily)

Futures are moving higher on dovish optimism following soft economic data overseas ahead of today’s jobs report but trade war developments were actually negative overnight.

German data disappointed overnight as Industrial Production fell -1.9% vs. (E) -0.5% while the trade surplus narrowed to 17.0B euros, a 9-month low.

The data is fueling hopes of a dovish policy shift from the ECB, however, after Draghi cited soft manufacturing trends as a concern earlier in the week which is helping EU shares outperform this morning.

Trade news was a net negative overnight as Mexican tariffs are still expected to be implemented on Monday (hopes of a delay pushed stocks higher yesterday afternoon) while there were no material developments on the China front.

Today, investors will be primarily focused on the Employment Situation Report due out at 8:30 a.m. ET (E: +180K job adds, 3.7% UR, 3.2% wage growth YoY).

Due to the huge dovish shift in Fed policy expectations over the last week, bad news will be good news for stocks as the odds of a summer rate cut will rise and the biggest risk for stocks is a “hot” print this morning, especially on wages.