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Daily Market Commentary

Commentary prepared by Balance Sheet Solutions, LLC, a wholly owned CUSO of Alloya Corporate Federal Credit Union. Balance Sheet Solutions is a leading broker/dealer, investment advisor and ALM risk management consultant to credit unions.

Wednesday, June 26, 2019 at 8:00 a.m. CST
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Balance Sheet Solutions

Market Indications

Historic Treasury Curves

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread-0.01-0.01
2s/10s Tsy Spread0.24-0.04
2s/30s Tsy Spread 0.79-0.03
DJIA-30 26548.22-179.32
NASDAQ 7884.72-26.01
S&P-500 2917.38-5.11
Dollar Idx 96.14+0.16
CRB Idx 180.88+0.89

Market Commentary

Recap – The S&P 500 ended -0.95% for the third down session in a row in the longest losing stretch since May 9. The Nasdaq and Dow ended -1.51% and -0.67%, respectively. The moves in rates proved less persistent, with two-year Treasuries ending flat and 10-year yields down -3 basis points, closing below 2% for the first time since the U.S. election day in 2016. In the U.S. fixed income market, five-year forward inflation swaps fell -5.4 basis points to 1.214%, 12 basis points lower from Friday’s intraday high. A big and worrying shift. Oh yeah — what ever happened to this alleged decline in core inflation being “transitory?”

Source: Bloomberg

Rates also rallied in Europe too, with German bund yields falling to another record low yesterday of -0.33 basis points, French 10-year debt also closed in negative territory for their first time ever at -0.009%, while Spanish and Portuguese yields fell to fresh lows. Meanwhile, the U.K. sold 30-year debt at an average yield of 1.42%, also a record.

The war of words continued between the U.S. and Iran. President Trump tweeted yesterday, “Iran leadership doesn’t understand the words ‘nice’ or ‘compassion,’ they never have. Sadly, the thing they do understand is Strength and Power.” He also described their statement as “very ignorant and insulting” and said, “Any attack by Iran on anything American will be met with great and overwhelming force.”

With rising geopolitical tensions, and ultra-dovish central banks, it’s worth noting that gold reached a fresh six-year high yesterday of $1423/oz and had its biggest one-week increase in over three years. It should be highlighted that more than $1.5 billion flowed into the SPDR Gold Trust exchange-traded fund last week, the largest inflow since August 2011.

It’s not just gold that’s rising; Bitcoin has tripled since early April and is at its highest level in over a year at $12,154 this morning. We’re still some way from the peak above $19,000 reached in trading at the end of 2017, but the scale of the recent appreciation is striking. Perhaps Facebook’s unveiling of its Libra currency has led investors to take another look at cryptocurrencies with fresh eyes.

Well, it was quite the day yesterday with a slate of softer U.S. data to digest.

First, the Conference Board showed consumer confidence falling to 121.5 in June (vs 131.0 expected), down from May’s revised 131.3 reading and the lowest since September 2017. There weren’t many positives to find elsewhere in the data, with the present situation falling to 162.6, the lowest since June last year, while the expectations reading fell to 94.1, the lowest since January.

Only 36.7% of respondents see the economy as being “good.” An even lower 18.1% believe things will get better in the next six months. Just 17.3% see more jobs coming, and a mere 19.1% expect to see a higher paycheck. And get this — just 31.4% believe the stock market is heading higher from here. It’s one thing to have this view in January (as was the case) coming off a near-20% meltdown. It’s quite another, and a heavy dose of reality, when we see a number like this close to the record highs.

Also, of note from the Conference Board, those saying that jobs were “hard to get” rose to 16.4%, the highest since November 2017, while the proportion saying that jobs were “plentiful” fell to 44.0%. The differential between the two, a closely watched gauge of labor market sentiment, had its sharpest shift in over a decade.

Other U.S. data proved no more promising. There was hope that lower mortgage rates would spark a renaissance in the U.S. housing market... but a shocking 7.8% crash in new home sales in May has blown that narrative out of the water.

This collapse is happening despite the plunge in mortgage rates. For the week ended June 21, mortgage applications for new home purchases sagged 0.9% after declining 3.5% the week before and are actually 5% lower now than they were in mid-April. If lower rates fail to resuscitate the most rates-sensitive sector there is, that does not augur well at all for the future and tells me that the central bank may have to enter the easing cycle kicking and screaming. But it will have no choice but to go (and go big), and the big story in the coming year is a return trip to the zero bound. Maybe even lower than that.

Source: Bloomberg

Ending the day for dismal data, the Richmond Fed Survey of Manufacturing Activity fell -2 points to 3, and retail sales figures were revised lower. The key “core control” index was revised lower to +0.4% in May as opposed to the prior showing of +0.5%.

St. Louis Fed President Bullard (voter), who is considered the most dovish member of the Committee (he favored of a rate cut at the June meeting), said that while the current environment seems like a good time for an “insurance rate cut,” the situation does not call for an immediate 50-basis-point cut. He said that such a move would be “overdone.” He went on to confirm that he is one of the Federal Open Market Committee (FOMC) members who favors 50 basis points of easing overall this year.

Fed Chair Jerome Powell’s remarks were dovish. He said, “Investment by businesses has slowed,” that “crosscurrents have re-emerged,” and that inflation expectations have declined. Who would have thought last December as he pledged two more hikes and more quantitative tightening that we would have heard Jay Powell support the “call for additional policy stimulus?”

And all of the sudden, the self-proclaimed “tariff man” is backing away from the threat to apply those extra tariffs on $300 billion of Chinese-made goods. Who would have thought? Note: Bloomberg Economics shows the cost from an escalating trade war could hit $1.2 trillion by the end of 2021. And speaking on CNBC this morning, Treasury Secretary Steven Mnuchin tried to sound upbeat on the prospects for a deal, saying that 90% of an agreement was already in place. (Ahhh... that ever elusive 10%.)

For the here and now, U.S. equity futures do seem to like the U.S. walk-back on the tariff threat, at least in the lead-up to the G-20 Summit (Trump-Xi meeting is on Saturday), as Dow futures have responded with a near triple-digit gain (and are just 1% off the highs even after this three-day stumble). Today we are seeing government debt markets trading in rare defensive fashion — up around two basis points in Japan and core Europe, while the yield on the 10-year Treasury note is rising closer to four basis points to 2.02%. That said, the big picture remains one of a bull market in long-duration, high-quality bonds. In other markets, the big mover overnight was oil; West Texas Intermediate is up +2.09% following a report from the American Petroleum Institute indicating that U.S. crude stockpiles fell by 7.55 million barrels last week.

Turning to the day ahead, we have May’s durable goods orders and wholesale inventories. Finally, this evening there’ll also be the first of two Democratic primary debates, in which the 20 participating candidates will be split over the next two nights.


Economic Calendar

June 24 - 28, 2019: The Week Ahead

Economic Calendar this week

Future Fed Expectations

Source: Bloomberg

Future Fed Expectations

Expected Fed Funds Path



Select Probabilities based on the Futures 
Probability of Fed Funds rate CUT on July 31, 2019100%
Probability of Fed Funds rate CUT on September 18, 2019100%

**All quoted rates are indications and are subject to change without notice.
* ISI is a member of the FINRA/SIPC.

The information contained herein is prepared by ISI Registered Representatives for general circulation and is distributed for general information only. This information does not consider the specific investment objectives, financial situations or particular needs of any specific individual or organization that may receive this report. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. All opinions, prices, and yields contained herein are subject to change without notice. Investors should understand that statements regarding future prospects might not be realized. Please contact Balance Sheet Solutions to discuss your specific situation and objectives.