Markets struggle while safe haven gold continues over $2900

Dow dropped 188, decliners over advancers about 5-4 & NAZ slid back 48.  The MLP index remained in the 319s & the REIT index fell 2+ to the 412s.  Junk bond funds fluctuated & Treasuries had buying which reduced yields.  Oil was about even at 69 & gold added 20 to 2928 (more on both below).

Dow Jones Industrials

An ominous measure that the Federal Reserve considers a near surefire recession signal again has reared its head in the bond market.  The 10-year Treasury yield passed below that of the 3-month note in trading today.  In market lingo, that’s known as an “inverted yield curve,” & it's had a sterling prediction record over a 12- to 18-month timeframe for downturns going back decades.  In fact, the New York Fed considers it such a reliable indicator that it offers monthly updates on the relationship along with percentage odds on a recession occurring over the next 12 months.  At the end of Jan, when the 10-year yield was about 0.31 percentage point clear of the 3-month, the probability was just 23%.  However, that is almost certain to change as the relationship has shifted dramatically in Feb.  The reason the move is considered a recession indicator is the expectation that the Fed will cut short-term rates in response to an economic retreat in the future.  Though markets more closely follow the relationship between the 10 & 2-year notes, the Fed prefers measuring against the 3-month as it is more sensitive to movements in the central bank’s federal funds rate.  The 10-year/2-year spread has held modestly positive, though it also has flattened considerably in recent weeks.  To be sure, yield curve inversions have had a strong but not perfect forecasting history.  In fact, the previous inversion happened in Oct 2022, & there’s still been no recession 2½ years later.  So while there’s no certainty that growth will turn negative this time around, investors worry that expected growth from an ambitious agenda under Pres Trump may not happen.

The Fed’s favorite recession indicator is flashing a danger sign again

Mortgage interest rates dropped again last week, hitting the lowest level in 2 months, but demand for mortgages didn't respond.  Total mortgage application volume fell 1.2% from the previous week, according to the Mortgage Bankers Association's seasonally adjusted index.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766K or less) decreased to 6.88% from 6.93%, with points dropping to 0.61 from 0.66 (including the origination fee) for loans with a 20% down payment.  “Treasury yields moved lower on softer consumer spending data as consumers are feeling somewhat less upbeat about the economy and job market.  This pushed mortgage rates lower, with the 30-year fixed rate decreasing to 6.88%, the lowest rate since mid-December,” said Joel Kan, MBA’s VP & deputy chief economist.  Applications to refinance a home loan, which had been surging through much of Jan early Feb, fell 4% for the week but were 45% higher than the same week 1 year ago.  Last year at this time, mortgage rates were 16 basis points higher.  “Although overall refinance application activity remained fairly weak, FHA refinance applications saw an 8 percent increase over the week,” Kan added. Applications for a mortgage to purchase a home were flat for the week & 3% higher than the same week 1 year ago.  The resale market is seeing more supply, partly because homes are sitting on the market longer.  But while there are more options, prices are not easing much, as inventories are still historically low.   “Long story short, bonds are in fashion at the moment,” wrote Matthew Graham, COO at Mortgage News Daily, noting that when demand rises, rates fall. “The broadest and most common explanations have to do with expectations for a downshift in global economic growth in response to domestic tariffs and cost-cutting efforts.”

Mortgage rates drop to lowest since mid-December, but demand still falls short

Eli Lilly (LLY) said it will invest at least $27B to build 4 new manufacturing sites in the US, as demand for its blockbuster weight loss and diabetes injections soars & the company develops new drugs for other conditions.  It comes as drugmakers & companies across different industries work to build goodwill with Pres Trump, who has emphasized reshoring manufacturing to the US & reducing reliance on foreign supply chains.  He has threatened companies, and pharmaceutical businesses in particular, with tariffs if they do not manufacture products in the US.  Eli Lilly made the announcement at an event in DC, emphasizing the political undertones of the strategy.  The event featured several speakers from the Trump administration, including Kevin Hassett, director of the White House National Economic Council, & Commerce Secretary Howard Lutnick, who explicitly tied the announcement to Trump’s policies.  Lutnick said the investment is “exactly what the Trump administration is all about, which is building and manufacturing and reshoring in America, investing in America, building in America.”  He thanked LLY for “doing exactly what the president was hoping would happen.”  Lutnick added that “if you want to understand the tariff policy” of the US, “I have just articulated it.”  The move brings LLY's total US manufacturing investments to more than $50B in recent years.  The other $23B is from the company’s investments in new plants & site expansions since 2020, which has helped ease supply shortages of its popular drugs.  The stock rose 15.57.

Eli Lilly plans at least $27 billion in new U.S. manufacturing investments

Gold prices eased after a recent record rally, while investors looked towards inflation data due later this week & the latest developments on Pres Trump's tariff plans.  Spot gold fell 0.7% to $2894 an ounce.  Bullion, a preferred hedge against uncertainty & inflation, hit a record high of $2956 on Mon amid trade war concerns emerging from tariff threats.  US gold futures fell 0.4% to $2908.  Yesterday, Trump ordered a probe into potential new tariffs on copper imports to rebuild US production of a metal critical to electric vehicles, military hardware, the power grid & many consumer goods.  Investors' focus was also on the US Personal Consumption Expenditures (PCE) report, the Federal Reserve's preferred inflation gauge, due on Fri.  Higher than expected inflationary could delay further rate cuts, which is priced in; gold is 1 of the quintessential hedges against those inflationary pressures.

Gold prices slip, investors eye upcoming US PCE data

Oil prices held at 2-month lows as a potential peace deal between Russia & Ukraine continued to weigh on prices while lower US crude stockpiles provided some support.  Brent crude was down 19¢ to $72.83 a barrel & US West Texas Intermediate crude oil futures fell by 13¢ to $68.80.  Prospects for a peace deal between Russia & Ukraine are improving & the market was also watching for potential implications of a minerals deal between the US & Ukraine.  This would take us a step closer to Russian sanctions being lifted, removing much of the supply uncertainty hanging over the market.  Downside risks on oil prices increased because Pres Trump's policies, such as initiatives to support higher oil exports by Iraq.  The US & Ukraine agreed terms of a draft minerals deal central to Trump's efforts to bring a swift end to the war in Ukraine.  Supporting price, US crude stocks fell by 640K barrels last week. 

Oil holds at two-month low on rising supply concern

Stocks pared gains after Pres Trump spoke about his tariff plans at a cabinet meeting as investors also braced for Nvidia's (NVDA) crucial earnings report due out after the bell.  The leg lower in stocks & risk assets came after Trump said tariffs against the EU would include 25% on autos among other goods, while levies against Mexico & Canada will go into effect on Apr 2.