VOLATILITY IS HERE TO STAY IN AUGUST

Stocks opened lower this morning, taking a breather after two days of gains. The Dow is down 218 pts and the SPX is down 1%. Technology (-1.7%) and energy (-1.3%) are the worst performing sectors. Only utilities are holding flat. The VIX Index climbed back to 18.5 this morning. European stock markets (and those in China) closed down by about 1%. Commodities are mostly lower on the day, save oil. Oddly enough, WTI crude oil spiked more than 3% to trade at $54.40/barrel even after an IEA report showed global oil demand at a decade low. It’s no secret that slower global economic growth is bringing down the rate of demand growth; at the same time, US producers continue to pump oil near record levels. It just goes to show that speculation and manipulation are rampant with commodities, and day-to-day prices moves often don’t make sense. Safe-haven Treasury bonds are gaining in price today, pushing yields lower. On the other hand, corporate bonds are falling in price.

President Trump hinted to reporters that next month’s scheduled trade talks between the US and China may be canceled. “We’ll see whether or not we keep our meeting in September. If we do, that’s fine. If we don’t, that’s fine.” He also mentioned that “we’re not ready to make a deal…” This is the reason stocks opened lower today.

Few are talking about it, but the yield curve—that is, the difference between long and short Treasury bond rates—is flattening again. This, not trade tensions, is the real reason bank stocks haven’t done well lately. The gap between the 10-year and 2-year Treasury yields has narrowed from .27% to just .08% in the space of one month. As a reminder, an inverted yield curve is generally viewed as a harbinger of economic recession. Quite a few bond fund managers have been expecting a steeper yield curve, either because better economic data should have pushed long-term rates upward, or the Fed rate cut would have pushed short-term rates lower. But with a slew of other central banks around the world cutting rates, it seems as though global investors are flocking into US Treasuries, resulting in lower long-term rates and a flat yield curve.

The Producer Price Index (PPI) held steady at 1.7% y/y growth last month. This closely-watched measure of wholesale inflation has been gradually slowing for an entire year. A big part of the reason is oil, which has fallen from about $70/barrel to $54/barrel. Of course, one would expect inflation to pick up due to higher trade tariffs, but that hasn’t played out. Stripping out the more volatile components of food & energy, Core PPI slowed to 2.1% from 2.3% in the prior month.


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