Yields Continue to Invert

Back to reality this week as the fundamental issues of a slowdown in global growth and a U.S.- China trade deal caused some broad-based buying of Treasuries. The 1 Year US Treasury is now yielding more than the 2,3, 5 or 7-year maturities. Treasuries are pricing in slower growth, pushing yields lower across the curve. The 2-yr yield decreased four bps to 2.46%, and the 10-yr yield decreased six bps to 2.63%. The 30 year is now back under 3% again.

Treasury Yields

 The S&P 500 managed to close the week above 2700 having spent some time below Thursday and Friday. Recurring concerns about a slowdown in global growth and the lack of progress on a US spending package prevented any real upside in the broad market. The Dow rose 0.2%, the Nasdaq gained 0.5%, mid-caps gained 0.6% with small caps climbing just 0.1%. Utilities, technology, industrials and real estate all gained over 1%. Energy fell 3.3% while materials and financials fell more than 1%.

There were some disappointing updates from Europe that stirred growth concerns including the Bank of England lowering its 2019 GDP growth outlook to 1.2% from 1.7%. The EU Commission also cutting its 2019 euro area GDP growth forecast to 1.3% from 1.9%. Adding to the global growth worries, Germany reported a 0.4% month/month decline in industrial production and a 1.6% decline in factory orders.

In M&A news this week. BB&T and SunTrust Banks announced an all-stock merger valued at approximately $66 billion, which would make it the sixth largest U.S. retail bank if approved.

In the week ahead, US-China trade talks continue as Treasury secretary Mnuchin and trade representative Lightizer travel to Beijing Monday. The 90-day truce agreed to, will expire on March 1stand both sides are looking for ways to compromise without looking like they are getting pushed around. The White House confirmed that it is unlikely POTUS will meet with China’s President Xi before the trade deadline. Reports, however, indicated that the White House could extend the deadline if necessary.

This Friday the 15th is the end of the three-week temporary spending package. If no deal is reached there could be a second Gov’t shutdown. We also get data this week on retails sales as well as inflation numbers (CPI & PPI).


Fixed Income

All the US yields one year or longer fell this week. On Thursday Fed’s Bullard said there was no need to raise the rate again right now.

FOMC January Statement     Federal Reserve Dot Plots Dec 18     US Debt Measurement   December Meeting Minutes    US Corporate Debt Tops $6 Trillion.  Treasury.gov yields


 Global Bond Yields

The one year US treasury now yields more than the 2, 3, 5 or 7 year.



Foreign Exchange Market


Energy Complex

The Baker Hughes rig count rose by 4 this week. There are 1049 oil and gas rigs operating in the US – Up 74 over last year.

  • Brent Crude Oil lost by 1.04% this week closing at $62.10/bbl
  • WTI Crude Oil fell 4.60% this week to close at $52.72/bbl
  • Heating Oil lost 0.22% this week closing at $1.908/gallon
  • Natural Gas  fell 5.52% this week closing at $2.583 per million BTUs
  • Unleaded Gas rose 0.66% this week at closing at $1.446/gallon


 Metals Complex

Gold continues to creep higher, trading up 3.3% in 6 days.

  • Gold lost 0.27% this week closing at $1318.00/oz
  • Silver fell 0.77 on the week closing at $15.81/oz
  • Palladium fell 0.47% this week closing at $1371.20/oz
  • Platinum lost 2.93% this week closing at 802.5/oz
  • Copper rose 1.35% this week closing at $2.810 /lb


Employment Picture

The economy continues to create jobs and the labor participation rate is starting to creep up after bottoming at 62.4% in September 2015


January Jobs Report  BLS Summary – Released 2/1 – The US Economy added 304k nonfarm jobs in January and the Unemployment rate increased to 4%. Hourly earnings rose  The December report was revised down 90k though. Hiring highlights to include Education and Health care +55kLeisure and Hospitality +74k, Professional and Business Services +30k, Construction +52k, and Transportation and Warehousing +27k.

  • Average hourly earnings increased by 3 cents/ 0.11% in January y/y hourly earnings are up 3.2%.
  • U3 unemployment edged upward by 0.1% to 4.0%. U6 unemployment rate increased 0.5% at 8.1%.
  • The labor force participation rate increased slightly from 63.1% to 63.2%.
  • The average workweek was unchanged at 34.5 hours.

Employment Cost Index –  Released 1/31/19 – Compensation costs for civilian workers increased by 2.9% for the 12-month period ending in December 2018 compared with a compensation costs increase of 2.6% in December 2017. Wages and salaries were up 3.1%, versus 2.5% for the 12-month period ending December 2017. Benefit costs increased by 2.8%, versus 2.5% in December 2017. For private industry workers, compensation costs increased 3.0% year-over-year, versus 2.6% for the 12 months ending December 2017. Wages and salaries increased 3.1% year-over-year, versus 2.8% for the 12 months ending December 2017. Benefit costs increased by 2.6%, versus 2.3% for the 12 months ending December 2017. This report is published quarterly. 

Weekly Unemployment Claims – Released Thursday 2/7 – In the week ending February 2, initial claims were 234k a decrease of 19k from the previous week’s level. The 4-week moving average was 224,750 an increase of 4,500 from the previous week’s revised average.


Job Openings & Labor Turnover Survey – JOLTS – Released Monday 1/8 – The number of job openings fell to 6.9 million on the last business day of November, the U.S. Bureau of Labor Statistics reported. Over the month, hires edged down to 5.7 million, quits edged down to 3.4 million, and total separations were little changed at 5.5 million. Within separations, the quits rate and the layoffs and discharges rate was unchanged at 2.3 percent and 1.2 percent, respectively.


This Week’s Economic Data

Links take you to the data source

Consumer Credit – Released 1/8 – Consumer credit increased at a seasonally adjusted annual rate of 6.5% in the fourth quarter and at a rate of 5% in December. For the 2018 calendar year, consumer credit increased 5%, with revolving and nonrevolving credit increasing 2.75%  and 5.5%, respectively.

U.S. Trade Balance – Released 1/8 – The U.S. Trade deficit was $49.3 billion in November, down $6.4 billion from $55.7 billion in October, November exports were $209.9 billion, $1.3 billion less than October exports. November imports were $259.2 billion, $7.7 billion less than October imports.

PMI Non-Manufacturing Index (ISM Services) – Released 2/5 – Economic activity in the non-manufacturing sector grew in January for the 108th consecutive month. ISM Non-Manufacturing registered 56.7 percent, which is 1.3 percentage points lower than the December reading of 58 percent. This represents continued growth in the non-manufacturing sector, at a slower rate.


Recent Economic Data

Links bring you to the data source

PMI Manufacturing ISM Index – Released 2/1 – December PMI increased 2.3% to 56.6% from December’s reading of 54.3%. The New Orders Index was up 6.9% to 51.3%. The Production Index registered 60.5% up 6.4%.

New Residential Sales – Released 1/31 – Last month sales of new single-family homes increased  by 16.9% to 657k, seasonally adjusted. The median sales price of new homes sold in November was $302.40k with an average sales price of $362.40k. At the end of November the seasonally adjusted estimate of new homes for sale was 330k. This represents a supply of 6.0 months at the current sales rate.

Chicago PMI – Released 1/31 – Chicago PMI decreased 7.1 points in January easing to 56.7, down from 63.8 in December. The Prices Paid indicator was unchanged for the month ending a five consecutive month decline.

Consumer Confidence  – Released 1/29 – The Consumer confidence index declined in January. The Index now shows a reading of 120.2 down from 126.6 in December. Despite the decline in January and despite weakened expectations regarding job prospects and business conditions, consumer confidence levels suggest economic conditions remain favorable.  Expectations declined sharply due to financial market volatility and the government shutdown. Consumers’ assessment of the current conditions was little changed. This marks three months in a row of decline in consumer confidence. Back to back declines in Consumer Confidence reflect a growing concern of a moderating pace of economic growth in 2019.

Personal Income – Released 1/21 – (Delayed release due to gov’t shutdown)  Personal Income increased 0.2% in November according to the BEA. The majority of this increase was due to increases in wages and salaries and increases in farm proprietor’s income. Real PCE (the Feds preferred inflation gauge) increased by 0.3%. Real disposable personal income increased by 0.2%.  Real Personal Consumption Expenditures (PCE) has risen 1.8% y/y.

3rd Estimate of 3rd Quarter GDP  Released 1/21 – (Delayed release due to gov’t shutdown)  According to the third estimate released by the Bureau of Economic Analysis, Real Gross Domestic Product (Real GDP) increased at an annual rate of 3.4% in the third quarter of 2018. This result is slightly lower by 0.1% from 3.5% seen in the second estimate. The general outlook of real GDP remains roughly the same. The third estimate data provided an upward revision to private inventory investment. Downward revisions were reflected in personal consumption expenditures (PCE) and exports.

Existing Home Sales Released 1/22 – Existing home sales decreased by 6.4% in December. Sales decreased to a seasonally adjusted rate of 4.99 million. Sales are currently down 10.3% from one year ago. Housing inventory declined to 3.7 months of inventory and the existing homes for sale declined to 1.55 million. The median sales price for all types of homes was $253,600, up 2.9% year/y.

Durable Goods Released 1/25 – (Delayed Release due to gov’t shutdown)  December – New orders for manufactured durable goods increased $1.9 billion or 0.8% to $250.8 billion in November. This increase follows two consecutive months of decline. Transportation equipment, up 2.9%, drove the increase by $2.5 billion to $87 billion.

Consumer Price Index – Released 1/11 – The Consumer Price Index declined 0.1% in December, core CPI, which excludes food and energy increased 0.2%. The monthly changes left total CPI up 1.9% year-over-year, versus 2.2% in November, and core CPI up 2.2%. The decline in total CPI in December was fueled by the energy index and gasoline index. A 0.3% increase in the shelter index drove the increase in core CPI, which was offset somewhat by a 0.2% decline in the price index for used cars and trucks.

US Light Vehicle Sales– Released 1/6 – (Delayed release due to gov’t shutdown)  U.S. light vehicle sales were at a seasonally adjusted annual rate (SAAR) of 17.40 million units in November versus a SAAR of 17.49 million units in October. The November run rate was down 0.7% from the SAAR of 17.52 million units for November 2017.

U.S. Construction Spending– Released 1/3 (Delayed release due to gov’t shutdown) – Last month construction spending decreased slightly by 0.1% in October measuring at a seasonally adjusted annual rate of $1,308.8 billion. The October figure is 4.9% above the October 2017 estimate. Private construction spending was 0.4% below the revised September estimate.

Next week we get JOLTS, CPI, PPI, Retails Sales, Industrial Production and Capacity Utilization figures.

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The views expressed represent the opinions and beliefs at the time of this commentary and are not meant as a market forecast. These views are subject to change at any time based on market or other conditions and Good Life Advisors disclaims any responsibility to update such views. This information may not be relied on as advice or as an indication of trading intent on behalf of any portfolio. Portfolio investments may change at any time.

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While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Data Sources:

Bureau of Economic Analysis (BEA)
Congressional Budget Office (CBO)
U.S. Bureau of Labor Statistics (BLS)
Federal Reserve Economic Data (FRED Charts)

CME Fed Watch
U.S. Treasury – Yields
U.S. Census Bureau
Institute for Supply Management (ISM)
Weekly DOL Employment Data
BLS Monthly Jobs Report

US Energy Admn (EIA)
BLS Consumer Price Index CPI
BLS Producer Price Index PPI
Atlanta Fed GDPNOW
NY Fed Nowcast GDP
US Census Bureau Housing Starts

Consumer Credit
USCB Retail Sales
Construction Spending
Federal Reserve Dot Plots
NY Empire Index
Philadelphia Federal Reserve
P/E Ratio Data -Yardeni Research

Technical Analysis Info:

StockCharts.com – Financial Charts
Exponential vs Simple moving average

Other Links:

1973 Arab Oil Embargo
Hunt Brothers Silver
Long-Term Capital bailout



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