Stocks sank in early trading (Dow -152 pts; SPX -1%). All eleven major market sectors are down, led by energy (-1.4%), healthcare (-1.3%) and tech (-1.3%). Interest rates are driving the stock & bond markets today (see below). European markets lost steam at the end of their session, closing roughly flat. Commodities are mostly lower today (copper -.3%; gold -.4%; iron ore -.2%). WTI crude oil backed down to $59.50/barrel. Bonds are, not surprisingly, higher on the day as yields tick lower. The 10-year Treasury yield fell to 2.37%, the lowest level since December 2017. Persistent concerns about global economic growth are propping up the bond market.

European Central Bank (ECB) chief Mario Draghi confirmed in a speech that accommodative monetary policy is still needed in Europe. He said the continent is going through an economic “soft patch,” but that doesn’t foreshadow a recession. Up until recently, the ECB was planning the gradual removal of monetary stimulus, but slowing economic growth has forced their hand. As a side note, the bank’s short-term policy interest rate has been below zero since June 2014 and this has led to the odd phenomena of negative bond yields, most notably in Germany. Today, Mr. Draghi noted that while negative rates are (theoretically) stimulative of growth, there are also some negative side effects, such as very low bank profitability. Negative interest rates on bank reserves are supposed to encourage banks to lend more money than they otherwise would, but negative rates also ensure very low profitability on those loans. The policy has been hotly debated around the world because it just doesn’t seem to pass the common sense test.

US bond yields, of course, have been significantly higher than in Europe or Japan. But according to the Wall Street Journal, bond traders are beginning to price-in (or anticipate) interest rate cuts by the Federal Reserve. Until recently, Fed policy has favored continued rate hikes, but slowing growth forced a flip-flop in their view. Within the span of several months, the Fed went from rather hawkish to very dovish. The Journal notes that as economic conditions in Europe have worsened, the US 10-year Treasury yield fell below that of the 3-month Treasury yield. That is, part of the yield curve is slightly inverted. Traders are beginning to think that the Fed may correct this by stepping in to lower short-term rates. Of course, it’s one thing to pause rate hikes as the Fed has already done, but it’s quite another thing to lower rates. That would probably be taken as a sign that the economic cycle is ending.

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