June 25, 2019

Stocks fell at the open on fresh trade provocations by the Trump Administration. The Dow and SPX are currently down 366 pts and 1.3%, respectively. Again, industrials and materials—which would fare the worst in a trade war—are down about 1%. The tech sector is down nearly 2% as semiconductors are also seen as vulnerable. On the other hand, defensive sectors like utilities and telecoms, are in the green. Asian stock markets continue to fall. The Shanghai Composite is down 20% from its January highs. The US dollar is about 5.5% stronger than it was in mid-April, and the Bloomberg Commodity Index is down 4.5% over the same period. WTI crude oil is down slightly to trade at $68.36/barrel. OPEC agreed to a vague increase in oil production.  

Bonds are trading modestly higher today as interest rates throughout the economy tick lower. The 5-year Treasury yield is back down to 2.74% and the 10-year yield is down to 2.87%. As I mentioned last week, longer-term yields are falling faster than short-term yields, which results in a flattening yield curve. The difference between the 2-year and 10-year Treasury yields is now at .34%. Why would you lock up your money for 8 additional years to gain only 1/3 of a percent in yield? Some say US yields are still higher than foreign sovereign yields, so global investors/insurance companies/banks are piling into long Treasuries. Others say investors are buying long-dated Treasuries because they believe the business cycle is peaking out. Maybe long rates are stubbornly low because the supply of new Treasury issues has been low relative to demand, or because investors are worried about escalating trade tensions. The point is, the “why” of the flattening yield curve is a conundrum. And the why is important, because lower rates are ignoring some key facts on the ground: the labor market is very tight, the economy is currently very strong, inflation is gradually rising, and US government budget deficits are rising. These facts argue for higher long rates. 

Yesterday, the Wall Street Journal reported that the Trump Administration is preparing to restrict cross-border investment from China. One specific aspect of that initiative will bar Chinese-owned companies from investing in “industrially significant technologies.” In concert with the Executive Branch, the Commerce Department is preparing to tighten regulations on US companies’ ability to export technology to China. But China isn’t the only country targeted by these rules. Treasury Secretary Mnuchin announced that all countries found to be stealing intellectual property from the US will face restrictions on investing in the US. Wall Street economists and strategies continue to warn that these restrictive trade measures will negatively impact the US stock market and economy. So it is a bit of a surprise that CNBC’s poll of voters revealed today that for the first time since the election, a majority of Americans approve of President Trump’s handling of the economy. 

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