July 19, 2018

Stocks gapped down at the open (Dow -86 pts; SPX -.29%). Utilities and real estate are rebounding, but most everything else is down in early trading. European markets are about to close down .4% and most of Asia was down overnight. China’s market is still down 20% on the year. WTI crude oil is trading up 1% to $69.50/barrel. Bonds are trading nearly flat yet again, and this month-long absence in yield volatility is not normal. That fact has some technical analysts calling for an upside breakout in yields sometime soon. 

The yield curve is flattening again and many analysts & economists are predicting an inversion some time this year. Today, the difference between the 10-year and 2-year Treasury note yields is down to .25%. Former Federal Reserve Governor Mark Olson admit, “Exactly why the long end is not moving is a bit of a mystery.” The last time the yield curve inverted was early 2006, almost two years before the Great Recession. The concern, of course, is that an inverted curve generally signals coming recession. But nearly all signs point to a very strong economy. That’s the conundrum, and it’s putting the Federal Reserve in an uncomfortable position. They’d like to continue raising rates in order to keep up with a very tight jobs market, but they also don’t want to be responsible for inverting the yield curve—a clear by-product of short-term rate hikes.  

Regional banks are taking it on the chin after reporting earnings. BB&T (BBT) is down over 4% this morning after reporting second quarter results in line with Wall Street forecasts. During the quarter, total revenue was flat with year-ago levels but earnings-per-share jumped 29% y/y. The outlook is a bit softer than expected. Management reduced its full-year 2018 revenue growth forecast to 1-3% from the prior 2-4% range. In addition, expenses will likely be flat with last year’s level compared with previous guidance for a slight decrease. Loans will grow somewhere in the 1-3% range. CEO Kelly King said BB&T is now back in acquisition mode and has been approached by several potential targets. Fifth Third’s (FITB) earnings announcement was pretty similar and the stock is down 4% at the moment. 

The US Index of Leading Indicators (LEI)—a combination of economic data intended to predict economic health over the next 6 months—improved a bit in June, regaining some of the momentum lost in May. LEI is 5.8% higher than it was a year ago, very close to the high end of its 7-year range. That’s good news, implying continued economic growth for the second half of 2018.  

Larry Kudlow, economic advisor to the Trump Administration, said in an interview yesterday that while some Chinese officials would like to negotiate an end to the trade war with the US, President Xi Jinping has refused. Mr. Kudlow said he doesn’t believe Xi has “any intention” of following through on previous negotiations. Today, China’s foreign ministry characterized that statement as “bogus,” as well as “shocking” and “beyond imagination.” So, a lot of superlatives there. 
 


*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.