10 Year Bond Yield - Another Rally On Tuesday
10 Year Bond Yield - Before getting into the 10 Year Bond Yield, let's review the market. S&P 500’s winning streak hit 4 days on Tuesday as it hit a new record high. It’s close to significantly distancing itself from the prior 3 record highs which are all closely grouped.
There isn’t an exact percentage increase that signals this is a breakou. But I’ll estimate being 5% above the April 30th high should do it. With its 0.29% increase on Tuesday, it is up 0.92% from that April high.
Whether or not this is a significant breakout yet, this has been a fantastic year that no one predicted. S&P 500 is up 18.6% year to date. It was up 19.42% in 2017. Meaning this year is about to pass that amazing one.
CNN fear and greed index is at 56 which is greed. This index isn’t exactly calling for a big decline as this is the lowest figure in that category.
Details Of The Action
10 Year Bond Yield - Nasdaq increased 0.22% and Russell 2000 fell 0.58% on Tuesday. Russell 2000 is up 15.72% year to date and down 6.02% in the past year. Partially because it has been hampered by its high financials weighting.
KBW regional bank ETF is up 11.37% year to date which normally would be fantastic. But it's a huge underperformance of the S&P 500 this year. The ETF was down 1.47% on Tuesday.
Best sectors on Tuesday were real estate and utilities which rallied 1.82% and 1.24%. Utilities are up 15.92% year to date. The utilities are underperforming the S&P 500. So be careful of any claims that the sector is dragging the market higher.
Those claims exist because it’s rare to see such strong gains in this sector especially in a year with great returns as great years are ‘risk on’ moments in which the utilities usually don’t thrive.
Worst sectors were energy and the financials which fell 1.74% and 0.18%. Both Brent and WTI oil fell over 4% on Tuesday on fears of a weakening global economy despite the OPEC+ supply cuts that were extended until March 2020.
10 Year Bond Yield - Rally In Treasuries Continues
This latest rally in the treasury market is simply remarkable. It’s even more surprising than the rally in stocks. I can’t say it’s more surprising than the rally in utilities because it’s the reason the sector has done so well.
Shockingly, the 10 year yield has fallen to a new 52 week low as it is at 1.95%. Record closing low was 1.36% in the summer of 2016. Compare the slowdown of 2015-2016 to the current one. You'll see the yield is fair because this slowdown isn’t as bad as the previous one. But there’s no reason to suggest it’s ending soon.
A confusing aspect is that the stock market is doing so well.
10 Year Bond Yield - Best explanation here is that the stock market isn’t much higher than the January 2018 high.
2 year yield is close to its 52 week low, but it’s not there yet as it is at 1.74%. It’s probably not at its low because the Fed isn’t signaling it will cut rates 50 basis points on July 31st. There is only a 27.6% chance the Fed will do so.
Last chance for the Fed to adjust its guidance will be after the June jobs report. If it’s awful, I could see the odds getting closer to 50%. The Friday jobs report is expected to show 165,000 jobs created.
To be clear, an awful report in my opinion is job creation below 50,000 and negative revisions to prior months. I don’t see that happening. Fact that new tariffs aren’t coming this month also makes a double rate cut less likely.
There is a 60.3% chance the Fed cuts rates at least 3 times. I see the Fed cutting rates once in July and once in December.
Trade Negotiations Catalyze Great Start To July
10 Year Bond Yield - One headline was trade worries limited the rally on Tuesday. That’s probably true in the sense if there was a trade deal tomorrow, stocks would rally sharply. But it’s funny to discuss limiting factors with the market at its all-time high.
News over the weekend was that Trump and President Xi agreed to a ceasefire on any new tariffs while they negotiate. It’s good to see negotiations, but a deal isn’t close. That’s why stocks haven’t exploded this week.
This news is probably good enough to help business sentiment. But not good enough to make businesses invest in long term ventures. Uncertainty still reigns.
10 Year Bond Yield - Only new tariffs or terrible economic data would have catalyzed a 50 basis point cut to the Fed funds rate.
Besides no new tariffs and a resumption of negotiations, Huawei is getting access to U.S. technology. Also, Chinese students will get better visa treatment, and America will get bigger purchases for its farmers.
Despite what any officials claim, the 2 sides aren’t close to a trade deal. The stock market doesn’t care if a trade deal is made in July of this year or in 3 years.
Major issue is the possibility of future tariffs. These negotiations lower the probability of new tariffs being announced soon. But we watch for another moment like in May when talks broke off and new tariffs were added shortly afterward. It’s not a surprise the 2 sides are talking. Neither side wants to see tensions escalating.
Conclusion
10 Year Bond Yield - The situation for markets hasn’t changed much as a result of the Fed’s decision and the G-20 summit. That’s obviously good news because stocks were rallying prior to these events.
There was never going to be a trade deal at the G20 summit or right after it. This summit was about renewing negotiations. Possibility of a deal in the intermediate term has increased. And possibility of new tariffs being announced in the next few months has fallen.
That’s a win for stocks. Biggest catalyst for stocks in the next few weeks is earnings season. Especially since we pretty much know the Fed will cut rates once at its next meeting.
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