By William Watts, MarketWatch
All eyes on Fed as top monetary policy makers attend
high-profile symposium
The bond market sent a warning, and this time the stock market
listened. Investors will be looking for clues in the week ahead
that policy makers are listening, too.
The yield on the 10-year U.S. Treasury note on Wednesday briefly
traded below the yield on the 2-year note, marking an inversion of
the yield curve -- a phenomenon seen as an often reliable recession
indicator, albeit with an average lag of more than a year. In fact,
the 10-year yield has traded below the 3-month T-bill yield since
late May -- an inversion of that portion of the curve is seen by
economists as an even more reliable recession indicator.
Read:5 things investors need to know about an inverted yield
curve
(http://www.marketwatch.com/story/5-things-investors-need-to-know-about-an-inverted-yield-curve-2019-08-14)
But the latest twist came amid a run of downbeat economic data
out of Asia and Europe, as well as an intensifying U.S.-China trade
war.
'Headline warning shot'
The latest inversion doesn't guarantee doom, but it is "a
headline warning shot about what's been going on over the last few
months," said Joe Mallen, chief investment officer at Helios Asset
Management, which manages $16 billion in combined adviser assets,
in an interview.
"At a very high level, people are really now genuinely concerned
about a recession in the U.S. in the next two years, and I think
that's fair," he said.
Related:For stocks, 'buying the dip' is now likely to be a
'losing proposition,' says UBS
(http://www.marketwatch.com/story/for-stocks-buying-the-dip-is-now-likely-to-be-a-losing-proposition-says-ubs-2019-08-13)
It was a volatile week for the stock market. The Dow Jones
Industrial Average slumped 800 points, or 3.1%, on Wednesday for
its biggest one-day percentage fall of 2019, while the S&P 500
tumbled 2.9% in the inversion-inspired selloff. Equities ended
mostly higher Thursday and then reclaimed a sizable chunk of ground
(http://www.marketwatch.com/story/dow-futures-rise-over-200-points-as-bond-yields-rebound-2019-08-16)
Friday, but still ended lower for the week. The S&P 500 saw a
1% weekly decline, while the Dow fell 1.5% and the Nadsaq Composite
was down 0.8%.
The 10-year/2-year measure of the curve ended the week with a
small upward slope after Wednesday's brief inversion. But
stock-market investors were also spooked by the size and speed of
the rally in Treasurys, a popular haven during periods of
uncertainty. Yields, which move the opposite direction of bond
prices, fell sharply to multiyear lows or, in the case of the
30-year Treasury bond , an all-time low, dipping below 2% for the
first time ever
(http://www.marketwatch.com/story/30-year-us-treasury-yield-breaks-below-2-2019-08-15)
before ending the week at 2.001%.
A global story
Of course, the moves in the Treasury market aren't all -- or
perhaps even mostly -- about the U.S. economy. That speaks to ideas
the Treasury rally is overdone, and vulnerable to a pullback that
could see yields rebound in the near term.
"The bond market rally is as much a global story as a U.S. one,"
said Kit Juckes, global macro strategist at Société Générale, in a
Thursday note, observing that weak data in Asia and Europe were the
culprits in sparking the Treasury rally that dragged down yields on
Wednesday. "But at some point, U.S. data need to justify the fall
in U.S. yields, or at least a bigger part of them than recent data
have."
The burgeoning supply of debt around the world that offer
negative yields -- the entire German government bond yield curve is
now in subzero territory -- means Treasurys remain attractive, even
if their yields are near or at all-time lows.
See:ECB prepared to deliver 'very strong' stimulus package,
policy maker says
(http://www.marketwatch.com/story/ecb-prepared-to-deliver-very-strong-stimulus-package-policy-maker-says-2019-08-15)
That factor is one reason some investors argue the inversion of
the yield curve might not offer as reliable of a signal about the
economic outlook as it has in the past. But those external factors
might be of limited comfort.
Interview:Central banks 'racing to the bottom' means the stock
market will do 'very well': Mark Mobius
(http://www.marketwatch.com/story/central-banks-racing-to-the-bottom-mean-one-thing-the-stock-market-will-do-very-well-says-mark-mobius-2019-08-15)
"The bottom line here is that markets fear the U.S. is being
sucked into the very low/negative rate vortex that is consuming
European sovereign debt," said Nicholas Colas, co-founder of
DataTrek Research, on Thursday. "The signal that sends: Japan-style
deflation and eurozone-like economic stagnancy. Not good."
On the other hand, low Treasury yields should be a positive for
stocks, in general, from a valuation perspective. And a record low
30-year bond yield should be a positive for housing.
Focus on the consumer
But the main worry for stock-market investors rests with the
U.S. consumer, who remains a pillar of the economy, said
Mallen.
Indeed, stronger-than-expected July retail sales data and upbeat
results from Walmart Inc. (WMT) were credited with stabilizing
stocks after Wednesday's inversion-inspired rout. But heightened
recession fears can become a self-fulfilling prophecy if consumers
pull back on spending.
All eyes on Jackson Hole
That puts the onus on the Federal Reserve and Chairman Jerome
Powell. Fed officials and some of the world's other top monetary
policy makers gather in Jackson Hole, Wyoming, beginning
Thursday.
Analysts and investors said the Fed could go a long way toward
calming the nerves of consumers as well as investors -- though
probably not President Donald Trump, who constantly bashes the Fed
for what he sees as insufficient speed in cutting rates -- if
Powell and fellow policy makers engage in some market-oriented hand
holding.
Also see:Investors might be disappointed in the Fed's message
from Jackson Hole
(http://www.marketwatch.com/story/investors-might-be-disappointed-in-feds-message-from-jackson-hole-2019-08-16)
A quarter-point rate cut by the Fed in September would likely be
a disappointment, Mallen said. A signal that the Fed is prepared to
be "a little more aggressive" in light of the recent developments
in the yield curve would offer reassurance.
"The comments, or lack thereof, from the Fed are probably going
to move the markets one way or the other," Mallen said.
(END) Dow Jones Newswires
August 18, 2019 09:37 ET (13:37 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.