U.S. Treasury yields are near historic lows and our flattened Treasury
yield curve may be a flashing a warning signal of a recession. “It's
even worse abroad. World sovereign yields are also at all-time lows and
the EU is in trouble,” said Lance Gaitan at Dent Research on July8, 2016.
Equity prices dipped a little this week, but remain much higher than they should be. Investors think central bankers will give the markets another shot of "heroin" and stimulate further. We all like our shots of good stuff, don’t we.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on July 8, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
The U.S. Added 287,000 Jobs in June, the Highest Total Since October 2015… The dismal reading of 38,000 jobs last month was actually revised lower
to 11,000, while the April total was adjusted a bit higher. The three-month
average is 147,000.
What it means – As noted last month, part of the ugly numbers for May was the Verizon strike, which took 37,000 jobs off the rolls. Those positions were added back in June, but that only accounts for part of this big number.
It seems like the Bureau of Labor Statistics (BLS) can’t get a handle on seasonal adjustments, which leads to big swings. But even with the high report, the rolling average remains moderate.
Stocks jumped on the news and bonds fell in price as investors reassessed the possibility of a Fed rate hike. I don’t think that’s on the table for the rest of the year. With the Brexit vote in the rearview mirror and another round of potentially disappointing earnings reports just ahead, it’s likely there is more downside ahead for the economy and the markets.
As for the birth/death adjustment, this month the BLS guessed that a net 92,000 jobs were created that they failed to capture in their surveys. Construction workers should be thankful, since 40,000 of those mythical jobs were in that industry.
U.S. Factory Orders Down 1.0% in May… Stripping out aircraft and defense spending, core capital goods orders dropped 0.4%, following a 0.9% decline in April.
What it means – Aircraft, autos, and defense spending tend to bounce around. The key part of this report is core capital goods, which reflects business investment spending. If companies aren’t investing in their future, it means they don’t see a lot of growth in the months and years ahead.
Minutes of June Fed Meeting Show Worries over Employment… Fed officials pointed to the weak employment figures from May, when the economy created only 38,000, as a main reason to hold rates steady by a vote of 10-0.
What it means – Fed officials have many obvious monetary policy tools, but people often forget the easiest one to wield – their words. After hiking rates in December for the first time in eight years, Fed members “talked up” rates for most of this year. All of their jaw-boning was undone first by the dismal May employment numbers, and then by the Brexit vote. Rates sit at historic lows and the central bankers are sidelined.
This brings up a recurring theme for the last nine years… after printing trillions of dollars, the economy is still just muddling through. That’s not much of a return on investment.
Swiss 50-year Government Bond Trades Below Zero… Investors bid up the price of the 50-year Swiss bond to negative 0.027%
What it means – As I’ve said before, there aren’t many, if any, rational bond buyers who want to lock up their money for half a century and get back less than they started with. That would be stupid. Instead, Switzerland is the victim of circumstance.
The Alpine country is not part of the Eurozone and it holds a lot of gold reserves, making the Swiss banking system appear stronger than all of its Continental peers. Nervous investors of all sizes are exchanging their euros for Swiss francs, but then they face a new dilemma. Do they hold the funds in banks, where they will pay for the pleasure of maintaining a balance due to negative short-term interest rates, or do they buy something?
It looks like many of them are choosing to invest, and Swiss government bonds are the least risky thing on the market. I’m not sure I’d buy a 50-year bond at negative interest rates, but it just points out how crazy the situation has become.
Italy Banned Short-Selling in the Stock of Its Third Largest Bank, Banca Monte dei Paschi di Siena… The stock has fallen from 93 euros in 2007 to less than 0.50 euros.
What it means – Italian financial regulators might be a little late with this one. After the stock price falls more than 99%, there’s not a lot more damage that can be done. But that doesn’t mean the pain is over. Just under 20% of Italian bank loans are non-performing, second only to the king of bad loans, Greece.
Italy never recovered after the financial crisis. It hasn’t been able to either off-load non-performing loans so that banks can resume lending, or restore confidence in its domestic economy. The country is stuck in neutral. Expect more bailouts, and possibly a bail-in or two, before this mess is over.
As the European banking crisis unfolds, global bond yields should dip further into negative territory.
Japanese Yen Falls Under 101, the British Pound Drops Below $1.30… The yen strengthened to recent highs and the pound fell to a multi-decade low against the U.S. dollar as uncertainty over Brexit and the general state of the global economy weighed on currency markets.
What it means – As discussed last week, the strong yen is close to crisis levels for the Bank of Japan, which needs a weaker currency to bolster trade and inflation. Japanese officials claim they will expand monetary policy to drive the currency lower if needed. Meanwhile, the falling pound is catching people’s attention in Britain. As the currency falls, British exporters earn more from international sales, which could boost local GDP.
The Brexit vote is responsible for some of the recent currency moves, but the bigger problem is that the world economy still hasn’t regained a solid footing. After almost a decade of low interest rates and central bank intervention, things remain shaky.
But true to form, don’t expect central bankers to get out of the way, even though their policies are failing. Instead, they’ll most likely double down again, printing more money and driving interest rates even lower.
Next Week – The week of July 11 brings few economic reports, but will include consumer prices and retail sales.
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