BOND MARKET DEBATE

Stocks opened higher this morning (Dow +89 pts; SPX +.5%). The best performing sectors include tech (+1.4%) and financials (+.7%). Sub-groups like biotechs and gold miners are also catching a bid. But real estate, energy and communications stocks are down in early trading. REITs just hit an all-time high, so it makes sense that we’d see some give-back here. The VIX Index continues to fall, suggesting traders are complacent about risk over the next 30 days. European markets will close higher by roughly .5% to 1% today. Asian markets also posted gains last night. The dollar is weaker against a basket of foreign currencies, giving a little boost to commodities. Remember, many commodities are priced in US dollars around the world. However, WTI crude oil ($58.40/barrel) is taking a breather today after a monster run year-to-date; same thing with copper (+11% YTD). Bonds are trading higher in price, lower in yield today. The 10-year Treasury yield ticked down to a fresh 2 ½ month low of 2.59%.

It’s tempting to think Treasury yields are sinking due to growing fear of further US economic weakness. Today, a note from BMO Capital called falling yields “a self-evident ominous sign.” They attribute today’s rally in bonds to a disappointing industrial production report (see below) and the firm worries about “weakening more broadly in the manufacturing sector.” I’m not sure that’s the right interpretation. Overseas demand for US Treasuries is strong, pushing rates lower. As Barron’s put it last weekend, “…global capital is coming to America, as the excess savings abroad are invested in the more vibrant US economy.” In addition, how does one square BMO’s negative view on the economy with the fact that junk bonds (i.e. SPDR High Yield Bond ETF) continue to power ahead? In fact, so far this year no other sector of the bond market has performed as well.

Adobe (ADBE) reported quarterly results this morning and the stock is down 4%. Quarterly revenue rose 25% and earnings per share rose 10% from year-ago levels. The company is making good progress growing its recurring revenue base. But while the CEO asserted “momentum continues in the business,” analysts are clearly concerned about earnings guidance for the next couple of quarters. The CEO said Wall Street’s expectations for the next two quarters were too high, and expectations for the last quarter of the year are probably too low. It just goes to show how edgy investors have become about any evidence suggesting slower growth.

US industrial production continued to slow in February. The year-over-year rate of growth in production reached an eight year high of 5.7% back in September, but since then has slowed to 3.5%. Bloomberg reacted thus: “data…show compelling signs of a sharp inventory correction in the latter part of the first quarter.” They assert that slower global demand for manufactured goods, plus higher levels of goods inventories don’t bode well for the near-term outlook. That’s a reasonable expectation. But I’d like to point out that panic here probably isn’t warranted. The US never achieved 3.5% production growth in any month during the period 2015-2017. In fact, 3.5% growth is still at the higher end of the range we’ve seen over the past eight years. Demand isn’t collapsing, and inventory corrections are temporary.


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