Since U.S. stock markets are closed tomorrow in observance of Good Friday this is written a day early. Geopolitical tensions have kept the markets on edge this week. Treasury yields dropped below the range established shortly after last year’s election, even after two rate hikes by the Fed. Volatility has spiked and, although stocks haven’t dropped all that much, with new geopolitical threats stalling the Trump Train investors can almost smell the increase in risk.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of April 13, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
10-Year Treasury Drops Under 2.3%, 30-Year Falls Below 3%... Interest rates on long bonds fell even as the Fed hints at higher rates later this year.
What it means – If you hear cries in the distance, it’s the sound of bankers sobbing as net interest margin, or the difference between long and short interest rates, evaporates. This is where banks make money. The pay us a paltry sum on our deposits, then lend it at higher rates. What they pay us is partially-determined by the Fed, which sets overnight rates, whereas loan rates are determined by the markets. This is where the fight starts.
The Fed has signaled several rate hikes this year, which has pushed up what banks pay to depositors. But the economy isn’t booming, with first-quarter GDP growth estimated at a mere 0.6%. As tax reform slips further into the future and other catalysts for growth fade, long interest rates are slipping. When short-term and long-term rates converge, banks get squeezed.
We’ve been calling for a flatter yield curve for some time, noting that long-term growth simply isn’t in the cards. As it plays out, expect financials to take a hit.
Puerto Rico Moves Closer to Bankruptcy… Congress issued a forbearance barring creditors from suing the commonwealth for not paying its debt, but the reprieve ends on May 1. The government and a Congressional oversight board haven’t been able to come to terms with creditors.
What it means – Who would have thought? Primary bondholders are first in line to repayment before all other expense and creditors. With Puerto Rico’s constitution on their side, they’re refusing any cuts. What’s wrong with them?
Every American should watch this scenario unfold because, along with Detroit, it provides a blueprint for future defaults around the country as the pension crisis brings down cities and states from Chicago to Houston. You’ve been warned.
Greece Reached a Tentative Agreement with Creditors… The two sides agreed to more pension cuts, higher taxes, and asset sales in exchange for releasing the latest installment of emergency funds.
What it means – After seven years and three bailouts, Greece still can’t pay its bills. The IMF has held out since last year, pointing out that the current deal is unsustainable.
It calls for Greece running a budget surplus of 3.5% forever (really, forever) to pay down debt. Since that’s never been done in the history of the world, it’s hard to believe that the fiscal basket case known as Greece can pull it off. But that’s OK.
The Mediterranean nation has promised to do lots of things to right the financial ship. Don’t think too hard about that fact that these are the same things Greek leaders promised over the last seven years. Just take them at their word.
Greece is still broke. EU officials pretend otherwise because to admit the failure would involve dealing with the financial pain of unpaid Greek debt owed to banks around the EU and unpaid Target2 balances, a topic Harry will cover in Boom & Bust this summer.
China Agrees to New Terms to Avoid Trade War with U.S…. The Chinese government increased the amount of foreign investment allowed under the Bilateral Investment Treaty, and will end the ban on U.S. beef imports.
What it means – In a week overshadowed by the fallout from Syrian air strikes and a terrorist attack in Europe, this economic tidbit got lost. While this isn’t a broad rewrite of how the U.S. and China will deal with trade, it represents an initial overture to avoid a costly trade war, and at least a small victory for President Trump.
If the president can keep up his rhetoric, then it’s possible he can extract trade concessions from many partners, thereby strengthening U.S. exporters.
Next Week – The week of April 17 brings reports on housing starts, industrial production, and existing home sales. See you again next Friday.
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