Wednesday, July 6, 2022

Markets slide lower while traders watch for signs of a recession

Dow dropped 135, decliners over advancers 2-1 & NAZ was off 61.  The MLP index sank 8+ to the 178s (shown below in a dreary chart) & the REIT index was even in the 411s.  Junk bond funds inched higher & Treasuries saw selling, bringing higher yields.  Oil was off another 3+ to 96 & gold slid back 16 to 1747.

AMJ (Alerian MLP index tracking fund)




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Higher borrowing costs are reducing the appetite for new financing as corps take a more conservative stance.  Global corp net debt has fallen by 1.9% to $8.1T in the past year, according to a new report .  The study of 900 top firms showed indebtedness is expected to decline by $270B in the coming year caused by higher interest rates & an anticipated economic slowdown, according to the corp debt index by investment firm Janus Henderson.  "Economic growth may slow or go into reverse, but companies are starting from a very profitable position," said Seth Meyer, fixed income portfolio manager at Janus Henderson.  While the trend globally was to trim borrowings, US companies' net debt rose by 0.5% in the past year.  The global economy has seen central banks inject Ts of $s to stem the impact of the COVID-19 pandemic.  Some borrowers in the corp bond market have opted to redeem their debt instead of selling new paper at higher costs, bringing the face value of listed bonds down by $115B since May 2021.  The decline in global corp debt, the first since at least 2014/2015, was heavily influenced by the energy sector, as high prices led oil & gas firms to cut their borrowings by $155B on a constant-currency basis.

Global corporate debt to drop amid higher funding costs: report

Mortgage rates dropped for the 2nd week in a row, but that didn't revive demand from homeowners or potential buyers.  Rates fell 10 basis points last week & have declined 24 basis points in the last 2 weeks, but total mortgage demand dropped 5.4% from one week ago, according to data from the Mortgage Bankers Association (MBA).  This week's results include a holiday adjustment to account for early closings the Fri before Independence Day.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647K or less) fell to 5.74% from 5.84%, with points increasing to 0.65 from 0.64, including the origination fee, for loans with a 20% down payment.  “Mortgage rates decreased for the second week in a row, as growing concerns over an economic slowdown and increased recessionary risks kept Treasury yields lower,” said Joel Kan, MBA's associate VP of economic & industry forecasting.  Those concerns showed up in applications to refinance a home loan, which dropped 8% for the week & were down 78% from the same week one year ago.  The refinance share of mortgage activity decreased to 29.6% of total applications from 30.3% the previous week.  Home purchase applications also fell for the week & the year – down 4% & 17%, respectively.  “Rates are still significantly higher than they were a year ago, which is why applications for home purchases and refinances remain depressed. Purchase activity is hamstrung by ongoing affordability challenges and low inventory,” said Kan.

Mortgage demand sinks, even as rates drop

Treasury yields swung between gains & losses today, but the closely watched 2-year/10-year yield curve remained inverted, a key recession warning.  The yield on the benchmark 10-year Treasury note rose more than 4 basis points to 2.856%, while the yield on the 30-year Treasury bond was up more than 4 basis points at 3.074%.  Yields move inversely to prices & a basis point is equal to 0.01%.  Market pros track the spread between longer duration Treasury yields & shorter duration yields, with the former typically higher.  However, the 2-year Treasury yield was at 2.798% today, above the 10-year.  That inversion, particularly if sustained, is often interpreted as a warning sign that the economy may be weakening & a recession could be on the horizon.  The 2-year to 10-year curve first inverted Mar 31, then again briefly in Jun.  The market has become increasingly concerned about the potential for recession in recent weeks as economic data has weakened, while Federal Reserve Chair Jerome Powell has committed to aggressive action to fight soaring inflation.  Should the central bank hike interest rates too sharply, the subsequent slowing of the economy could tip into recession.

Treasury yields rise in choppy trading, yield curve remains inverted

With new data coming in it looks like & feels like a recession.  If that proves correct, the recession is mild.  But there is the potential for such a recession to worsen & investors are very nervous.  Presently Dow is down about 5½K YTD!!!

Dow Jones Industrials


Tuesday, July 5, 2022

Markets off session lows while oil slides below $100 per barrel

Dow finished at the best level today (down 129), decliners over advancers only 5-4 & NAZ gained 194.  The MLP index gave back 4+ to the 187s & the REIT index pared losses, off only 1+ to the 411s.  Junk bond funds drifted lower & Treasuries remained in heavy demand, taking yields lower,  Oil continued weak (down 9 to the 99s) & gold tumbled 34 to 1767 on the strong $ (more on both below).

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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The Federal Reserve's key gauge for tracking US economic activity currently estimates that GDP shrank in Q2 even more than in the first, increasing concerns that the country may already be in a recession.  The latest reading from the Atlanta Federal Reserve Bank's GDPNow model, which is considered the central bank's primary tool for measuring growth in real-time, indicated Jul 1 that real GDP shrank by 2.1% on a seasonally adjusted annual rate in Q2.  That is a 1.1% drop from GDPNow's -1.0% reading from the day before, when the gauge went negative.  The next estimate from the tracker will be released Thurs.  While the official advance estimate of Q2 performance will not be available until the end of the month, these preliminary readings show the second consecutive quarter of negative growth in the economy after GDP contracted 1.6% in Q1.  If further readings confirm that the economy did, indeed, shrink in Q2, the technical criteria for a recession will be met, which is defined by 2 consecutive qtrs of negative growth.  However, the National Bureau of Economic Research (NBER) is the authority that makes the official determination.  Some economic slowdown was expected as the Federal Reserve began implementing interest rate hikes earlier in the year in an attempt to cool inflation, which reached a 4-decade high in May.  The central bank's challenge is to bring down soaring prices without going too far in slowing growth, but Fed Chair Powell said last week that failing to tame inflation would be a greater risk to the economy than entering a recession.

US may be in recession, Atlanta Fed data show

The bond market is flashing a warning that the economy may be falling or already has fallen into recession, according to one closely watched measure.  Market pros watch the spread on the Treasury yield curve, or the difference between the longer duration Treasury yields & shorter duration yields.  But the 2-year yield has now risen above the 10-year yield.  As of today, the 2-year Treasury yield was at 2.792%, above the 2.789% rate of the 10-year.  That inversion is a warning sign that the economy could be weakening & a recession is possible.  One way to look at the importance of the yield curve is to think about what it means for a bank.  The yield curve measures the spread between a bank's cost of money versus what it will make by lending it out or investing it over a longer period of time.  If banks can’t make money, lending slows & so does economic activity.  After a burst higher to nearly 3.5% in mid-Jun, the 10-year yield has slumped to 2.78%, & was hovering just below the 2-year note’s 2.79% yield.  The 10-year had moved higher on worries about inflation, but reversed course as investors became more worried about the economy.  Yields move opposite bond prices.  The benchmark 10-year is widely watched because it influences mortgages & other lending rates.  The 2-year is much more influenced by the Federal Reserve's interest rate hikes, & it has been moving higher. 

Bonds flash recession warning light as key part of the yield curve inverts again

Oil prices tumbled today with the US benchmark falling below $100 as recession fears grow, sparking fears that an economic slowdown will cut demand for petroleum products.  West Texas Intermediate crude (WTI), the US oil benchmark, slid 9% ($9.83) to trade at $98.60 per barrel.  The contract last traded under $100 on May 11.  Intl benchmark Brent crude shed 9.9% ($11.46) to trade at $102.04 per barrel.  Both contracts posted losses in Jun, snapping 6 straight months of gains as recession fears cause traders  to reconsider the demand outlook.  Prices have been elevated since Russia invaded Ukraine, raising concerns about global shortages given the nation's role as a key commodities supplier, especially to Europe.  WTI spiked to a high of $130.50 per barrel in Mar, while Brent came within striking distance of $140.  It was each contract's highest level since 2008.  But oil was on the move even ahead of Russia's invasion thanks to tight supply & rebounding demand.  High commodity prices have been a major contributor to surging inflation, which is at the highest in 40 years.  Prices at the pump topped $5 per gallon earlier this summer, with the national average hitting a high of $5.016 on Jun 14.  The national average has since pulled back amid oil's decline & sat at $4.80 today.  Despite the recent decline some experts say oil prices are likely to remain elevated.

Oil tumbles more than 9%, breaks below $100 as recession fears mount

Gold fell below the key $1800-an-ounce level to settle at its lowest price so far this year on back of a rise in the $ index toward a 20-year high.  Gold prices for Aug dropped $37 (2.1%) to settle at $1763 an ounce after touching a low at $1763.  Prices for the most-active contract marked their lowest finish since early Dec.  The greenback traded at a new 22-year high against the €, with one $ buying roughly 1.03€s.  The ICE US. Dollar index was up 1.5% at 106.66, trading around the highest levels since in 20 years.  Minutes from the Federal Reserve Open Market Committee’s Jun meeting, due out on tomorrow, as well as the monthly data on U.S. nonfarm payrolls, due Fri, are the 2 most important events for the yellow metals, which are likely to bring significant volatility to the price.

Gold prices settle at their lowest level of the year as the dollar index climbs toward a 20-year high

Oil futures fell sharply, with US prices below the $100-a-barrel mark - at their lowest in nearly 2 months, pressured by strength in the $ & concerns over a possible recession that would hurt energy demand.  WTI oil's fall was inevitable as the market rebalances after fears of sanctions give way to the realities of Russian sales to new buyers in Asia & the impact of high prices on demand & the economy.  West Texas Intermediate crude for Aug fell $8.93 (8.2%) to settle at $99.50 a barrel, the lowest front-month finish since May 10.

Oil futures settle sharply lower, with U.S. prices below $100 a barrel

The first estimate for Q2 GDP will likely be slightly negative, shown above.  That would show a recession, although not a significant one.  Of course, Q3 remains uncertain.  High interest rates generally pinch the economy.  That is done to reduce inflation.  Keep your fingers crossed that the pain is not too difficult to deal with.  That's what the late day buyers are hoping for.

Dow Jones Industrials

Markets plummet as recession concerns increase

Dow plunged 795 to session lows, decliners over advancers 4-1 & NAZ dropped 107.  The MLP index declined 7+ to 185 & the REIT index nosedived 10+ to the 402s.  Junk bond funds slid lower & Treasuries had more buying, reducing yields (more below).  Oil sank a very big 5+ to the 102s & gold retreated 32 to 1769.

AMJ (Alerian MLP index tracking fund)




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It's a big week for jobs data, but investors will be missing one key influential report; the ADP data, a widely viewed pre-cursor to the gov's monthly data.  The human resources management software & services provider will pause the Jul 7 & Aug 3 releases of its monthly national employment report as the company retools its methodology.  The revamped report will provide a "more robust, high-frequency view of the labor market and trajectory of economic growth" the company specified.  "ADP's extensive dataset of over 26 million U.S. employees offers a tremendous ability to deliver a strong read of the labor market and pulse of U.S. employment," ADP chief economist Nela Richardson said.  "As the leader in providing deep data on the world of work, our goal is to issue indicators that inform business leaders, members of academia, economists and policymakers with a reliable read of the workforce."  In Apr, ADP announced it would collaborate on the new report with the Stanford Digital Economy Lab, which focuses on how technologies such as artificial intelligence are affecting the workforce, business & society.  At the time, the firms said that the report's expanded research would include an "extensive microdata analysis to understand career paths for lower-wage workers" & create new academic research on topics related to economic growth & the future of work.  ADP's move comes as its national employment report has previously received criticism for having a poor track record of predicting the private payrolls count in the Bureau of Labor Statistics' employment situation report due to methodology differences.

ADP revamping national employment report

Treasury yields were mixed as concerns about a potential economic recession continued to send investors in search of safety.  The yield on the benchmark 10-year Treasury note dropped 8 basis points to 2.824%, while the yield on the 30-year Treasury bond fell more than 5 basis points to 3.072%.  Yields move inversely to prices & a basis point is equal to 0.01%.  The 2-year Treasury yield & other short-dated yields rose, however, flattening the yield curve.  Markets reopened today following the July Fourth holiday after the major averages finished another losing week, compounding one of the worst first halves in decades.  In this shortened week, investors are looking ahead to the release of Jun jobs report data on Fri.  The estimates is for job growth to slow in Jun, with 250K nonfarm payrolls added, down from 390K in May.  The unemployment rate is expected to hold at 3.6%.  May factory orders today came in better than expected.

10-year Treasury yield slips as recession fears rattle market

The € fell to its lowest level in 2 decades as fears of a recession in the euro zone ramped up, with gas prices soaring & the Ukraine war showing no signs of abating.  The € shed around 1.3% to hit $1.029, having earlier been as low as $1.028.  Euro zone inflation hit a record 8.6% in Jun, prompting the ECB to give markets advance notice of its intention to hike interest rates for the first time in 11 years at its Jul meeting.  However, growing fears of a recession may limit the central bank's capacity to tighten monetary policy.  The Jul Sentix Economic Index showed investor morale across the 19-country euro zone has plunged to its lowest level since May 2020, pointing toward an “inevitable” recession.  Record-high inflation in Europe has been abetted by skyrocketing gas prices over recent months.  Natural gas prices in Europe extended their relentless rise, climbing to highs not seen since early Mar as planned strikes in Norway added to market woes about Russian supply cuts.  The front-month gas price at the Dutch TTF hub, a European benchmark for natural gas trading, was last seen trading up 7.8% to hit 175.5€s ($180.8) per megawatt-hour.  All of these factors have converged to hit the € hard.  The currency of the euro zone has lost over 9% of its value against the $ since the start of the year.  The $'s strength continues, meanwhile, as risk-averse investors seek a safe haven & the US Federal Reserve embarks upon what looks to be an aggressive rate hike regime.

Euro slides to 20-year low against the dollar as recession fears build

It seems like nothing is going right n the stock market.  Interest rates are rising with the objective to lower high inflation.  The collateral damage is that it can bring on a recession & that carries the potential of getting very ugly.  Investors are so nervous they are not even buying safe haven gold.  The Dow chart is not pretty as Dow is trying to hold above 30K.  That will be its next major test.

Dow Jones Industrials