The dreaded inverted yield-curve has arrived. It’s a key data point for investors who fear it means trouble ahead for the economy — and a possible end to this historic rally in the stock market.
But if history is any indication, rate-obsessed stock investors might be in better shape than they think, and some on Wall Street say that new macroeconomic realities make the yield-inversion a red herring.
On Wednesday, the yield on the benchmark 10-year Treasury note broke below the 2-year rate. The odd bond market scenario has been an early, yet historically reliable sign of recessions. The so-called inversion shows show jitters about the global economy as investors run to safe havens. The last time this part of the yield curve inverted was in December 2005 — two years ahead of the financial crisis and recession.
What’s different this time?
Markets sold off sharply after the bond market’s recession warning. Still, some Wall Street analysts are urging investors to consider the bigger picture, and say this yield inversion might be different. Josh Brown, CEO of Ritholtz Wealth Management, highlighted that the last nine times the yield curve inverted, interest rates were above 6% and yields at 2% are “a very different situation.”
Because the yield curve is now widely seen as recession red flag, it’s more closely watched. As a result, is going to act differently, Brown said. Few people were paying attention to yield inversions in the 1980’s and 1990’s, he said.
“Markets are too complex to believe than any indicator can be an open and shut case once that indicator becomes widely discovered and gamed by trillions of dollars worth of trades,” Brown said.
He pointed to Japan, where the yield curve has become a much less reliable economic indicator and rates have been low or near zero for decades. Brown said that’s a sign that the yield curve “may contain less information for forecasters at lower absolute levels,” near where U.S. Treasurys are now.
Former Federal Reserve Chair Janet Yellen also warned that investors might want to think twice about trusting the yield curve inversion as the a recession indicator. Yellen acknowledged that it has been a “pretty good signal of recession” in the past, and “that’s when markets pay attention to it.”
“But I would really urge that on this occasion it may be a less good signal,” Yellen said on Fox Business Network Wednesday.
When asked if the United States is headed into a recession, Yellen said “I think the answer is most likely no” and that the U.S. economy has enough strength to avoid that. She did say the odds “have clearly risen and their higher than I’m frankly comfortable with,” Yellen said.
Lower bond yields abroad are also seen as weighing on yields in the U.S. Roughly $15 trillion worth of government bonds worldwide, or 25% of the market, trade at negative yields, according to Deutsche Bank. That number has tripled since October 2018.
“We’re in a globalized system, what’s happening overseas is pulling U.S. yields down and they’re going to stay lower,” Joseph LaVorgna, managing director and chief economist for the Americas at Natixis, told CNBC’s “Squawk Box “ this week.
Low inflation in the U.S. that could be contributing to lower rates. Consumer prices rose more quickly than expected in July, helped by a jump in gasoline and the rising cost for rent. The consumer price index for all items was up 0.3% for the month, above expectations for a 0.2% increase. On an annualized basis, the core inflation rate increased 2.2%, while the headline number was up 1.8%.
If there was inflation risk, Lavorgna said the 10-year Treasury yield would be significantly higher, perhaps at least 2 percent.
“Now is not the time to panic, but the yield curve is telling you that growth is weakening,” Lavorgna said.
Over the past 60 years, new lows for interest rates haven’t always signaled new lows for stocks in the months that follow, according to analysis by Bespoke Investment Group. The firm found that when the 10-year Treasury Note yield hits a 52-week low, as it did this week, average forward returns for the S&P 500 are higher the following day, week, month, three months, six months and year.
“If anything, the historic precedent for equity market returns when rates are at new lows is bullish not bearish,” Bespoke’s George Pearkes says.
U.S. government debt yields fell within 10 basis points of a 52-week low Tuesday as investors continued to pour into safe-haven bets. The trade war between the U.S. and China two largest economies and concerns of slowing global economic growth have also pushed investors into assets like gold.
“Going forward, should we expect stocks to follow the path of interest rates lower? Not necessarily,” Pearkes said. “There’s a wide range of results: everything from strong bull markets to the start of bear markets to cycle lows.”
Given the risk-aversion showing up in long-term interest rates, Pearkes said you might expect equity markets “to be on the ropes to a greater degree than is currently the case.” The Dow Jones Industrial Average fell as much as 620 points Wednesday but is still up 10% this year. The S&P 500 is still up 14%.
To be sure, the flattening yield curve is still saying something. Peter Boockvar, chief investment officer of Bleakley Advisory Group, called the latest yield inversion “the last domino” in what has been a years-long progression.
“You can’t ignore the trajectory of this flattening,” he said. “While there are different things that drove the inversion, people are still worried about the global economy.”
Low interest rates have resulted in some upbeat factors in the housing market, like a surge in refinancing, and strong mortgage applications. But Boockvar said there are still signs of a soft housing market and that new home purchases are anemic. Data out of China Wednesday, global PMI and weakness in U.S. manufacturing also back up investors’ worries about the global economy.
“There’s a laundry list of data points that show weakness — the Fed will try to offset that because the first rate cut didn’t do it,” Boockvar said.
Hong Kong police and protesters clash, ending violence lull
An anti-extradition bill protester throws Molotov cocktails during clashes at a march to demand democracy and political reforms, at Kowloon Bay, in Hong Kong, China August 24, 2019.
Tyrone Siu | Reuters
Hong Kong protesters threw bricks and gasoline bombs at police, who responded with tear gas, as chaotic scenes returned to the summer-long anti-government protests on Saturday for the first time in nearly two weeks.
Hundreds of black-clad protesters armed with bamboo poles and baseball bats fought with police officers wielding batons on a main road following a march against “smart lampposts” that was sparked by surveillance fears.
The chaotic scenes unfolded outside a police station and a nearby shopping mall as officers in riot gear faced off with protesters who set up makeshift street barricades.
The violence interrupted nearly two weeks of calm in Hong Kong, which has been gripped by a turbulent pro-democracy movement since June.
Police fired tear gas to disperse the crowd after repeated warnings “went futile,” the government said in a statement. By early evening, most of the protesters had dispersed, though clashes flared up in other neighborhoods.
Earlier in the day, some protesters used an electric saw to slice through the bottom of a smart lamppost, while others pulled ropes tied around it to send it toppling and cheered as it crashed to the ground.
The protest march started peacefully as supporters took to the streets to demand the removal of the lampposts over worries that they could contain high-tech cameras and facial recognition software used for surveillance by Chinese authorities.
The government in Hong Kong said smart lampposts only collect data on traffic, weather and air quality.
The protesters chanted slogans calling for the government to answer the movement’s demands. The protests began in June with calls to drop a now-suspended extradition bill that would have allowed Hong Kong residents to be sent to China to stand trial, then widened to include free elections for the city’s top leader and an independent inquiry into alleged police brutality.
“Hong Kong people’s private information is already being extradited to China. We have to be very concerned,” organizer Ventus Lau said ahead of the procession.
The semiautonomous Chinese territory has said it plans to install about 400 of the smart lampposts in four urban districts, starting with 50 this summer in the Kwun Tong and Kowloon Bay districts that were the scene of Saturday’s protest march.
Hong Kong’s government-owned subway system operator, MTR Corp., shut down stations and suspended train service near the protest route, after attacks by Chinese state media accusing it of helping protesters flee in previous protests.
MTR said Friday that it may close stations near protests under high risk or emergency situations. The company has until now kept stations open and trains running even when there have been chaotic skirmishes between protesters and police.
Lau said MTR was working with the government to “suppress freedom of expression.”
Also Saturday, Chinese police said they released an employee at the British Consulate in Hong Kong as scheduled after 15 days of administrative detention.
Simon Cheng Man-kit was detained for violating mainland Chinese law and “confessed to his illegal acts,” the public security bureau in Luohu, Shenzhen, said on its Weibo microblog account, without providing further details.
The Chinese government has said that Cheng, who went missing after traveling by train to mainland China for a business trip, was held for violating public order regulations in Shenzhen, in a case that further stoked tensions in Hong Kong, a former British colony.
The British government confirmed his release.
“We welcome the release of Simon Cheng and are delighted that he can be reunited with his family,” the Foreign and Commonwealth Office said in a statement, adding that Cheng and his family had requested privacy.
Cheng, a Scottish government trade and investment officer, was a local employee without a diplomatic passport.
The Global Times, a Communist Party-owned nationalistic tabloid, said Thursday that he was detained for “soliciting prostitutes.” China often uses public order charges against political targets and has sometimes used the accusation of soliciting prostitution.
As EU threatens trade retaliation, Brazil fights Amazon fires
A charred trunk is seen on a tract of Amazon jungle that was recently burned by loggers and farmers in Iranduba, Amazonas state, Brazil, August 20, 2019.
Bruno Kelly | Reuters
European leaders on Friday threatened to tear up a trade deal with South America, reflecting growing international anger at Brazil as a record number of fires in the Amazon rainforest intensified an unfolding environmental crisis.
Amid a global chorus of concern and condemnation, Brazil’s right-wing President Jair Bolsonaro pledged in an address to the nation to mobilize the army to help combat the blazes, while his administration launched a diplomatic charm offensive to try to mend bridges overseas.
Forest fires in the Brazilian Amazon, which accounts for more than half of the world’s largest rainforest, have surged in number by 83% this year, according to government data, destroying vast swathes of a vital bulwark against global climate change.
French President Emmanuel Macron called for G7 leaders to discuss the environmental crisis in Brazil at a summit this weekend in the French coastal resort of Biarritz. Both France and Ireland threatened to oppose an EU trade deal struck in June with a regional South American bloc following Brazil’s response.
In the Cypriot capital Nicosia, a sign tied to the railings of Brazil’s diplomatic mission read: “The Amazon belongs to Earth not to the Brazilian president.”
Bolsonaro, who initially accused non-governmental organizations of setting the forest on fire without providing any evidence, said in a televised address he had authorized the use of troops to fight the fires and stop illegal deforestation in the Amazon.
But the former military officer attributed the scale of the fires to dryer-than-average weather and insisted on the need for economic development of the Amazon to improve the lives of its 20 million inhabitants.
Environmentalists have warned that his controversial plans for more agriculture and mining in the region will speed up deforestation.
“We have to give the population the opportunity to develop and my government is working for that, with zero tolerance for crime – and that is no different for the environment,” Bolsonaro said in his televised speech.
Polls show Brazilians overwhelmingly oppose his policy on the environment and as he spoke to the nation, residents in large cities across Brazil banged on pots and pans in a traditional Latin American form of protest.
President Donald Trump – whose skeptical views on climate change Bolsonaro shares – called the Brazilian president to offer help, if needed, in dealing with the wildfires.
“I told him if the United States can help with the Amazon rainforest fires, we stand ready to assist!” Trump said in a post on Twitter.
G7 set to discuss fires
The wildfires now look set to be discussed at the summit of G7 leaders in France this weekend, where Macron has called for leaders to sign a charter to protect biodiversity. The French leader said an “ecocide” was taking place in the Amazon that required an international response.
British Prime Minister Boris Johnson tweeted that the fires were “not only heartbreaking, they are an international crisis,” while a spokeswoman said Johnson would use the summit to call for a renewed focus on protecting nature.
France and Ireland said on Friday they would now oppose the E.U.-Mercosur farming deal struck in June between the European Union and the Mercosur countries of Brazil, Argentina, Uruguay and Paraguay.
The French president’s office accused Bolsonaro of lying when he downplayed concerns over climate change at the G20 summit in June.
“There is no way that Ireland will vote for the EU-Mercosur Free Trade Agreement if Brazil does not honor its environmental commitments,” Ireland’s Prime Minister Leo Varadkar said in a statement.
The EU-Mercosur deal took 20 years to negotiate, but will not be officially ratified for at least another two years.
Brazilian business leaders also warned the backlash over Brazil’s environmental record could sink its efforts to join the Organization for Economic Co-operation and Development (OECD), a Paris-based club of 37 developed nations whose imprimatur is required by many institutional investors.
Stung by the international outcry, Brazil distributed a 12-page circular, exclusively seen by Reuters, to foreign embassies, outlining data and statistics defending the government’s reputation on the environment.
Having first dismissed the fires as natural, then blaming non-governmental organizations without evidence for lighting them, Bolsonaro appeared to adopt a more serious approach on Friday following the international outcry, summoning top cabinet members for an afternoon meeting to tailor a response.
Agriculture Minister Tereza Cristina Dias insisted that Brazil was “taking care” of the Amazon, and that international concerns over the fires needed to cool down.
“The news is worrying, but I think we have to lower the temperature. The Amazon is important, Brazil knows that, and Brazil is taking care of the Amazon,” she told reporters.
‘Interfering with our sovereignty’
The Brazilian space agency INPE has registered 72,843 fires this year, the highest number since records began in 2013. More than 9,500 have been spotted by satellites over the past week.
Although fires are a regular and natural occurrence during the dry season at this time of year, environmentalists blamed the jump on farmers clearing land for pasture.
Farmers may have had at least tacit encouragement from the firebrand right-wing president, who took power in January.
Bolsonaro has repeatedly said he believes Brazil should open up the Amazon to business interests, allowing mining, agricultural and logging companies to exploit its natural resources.
On Thursday, Bolsonaro admitted for the first time that farmers may be behind some of the fires but he responded angrily to what he saw as foreign interference.
Some foreign donors – including the biggest, Norway – have slashed their funding to an Amazon Fund designed to curb deforestation in the region in protest at changes introduced by Brazil that blocked its operations.
“These countries that send money here, they don’t send it out of charity … They send it with the aim of interfering with our sovereignty,” Bolsonaro said.
Alexandre Antonelli, director of science at Britain’s Kew Royal Botanic Gardens, urged that import sanctions be imposed on Brazil because of the fires.
“Immediate action is necessary to extinguish the current fires and prevent future ones,” the Brazilian scientist said.
Trump is meeting with world leaders at G7 as he escalates US-China trade war
U.S. President Donald Trump and First Lady Melania arrive in Biarritz for the G7 summit, France August 24, 2019. REUTERS/Regis Duvignau
Regis Duvignau | Reuters
President Donald Trump arrived in France on Saturday for the annual meeting of the Group of 7 powers, one day after he called his Federal Reserve chief an enemy of the United States and urged American companies to end business with China in the midst of an escalating trade war.
The summit comes amid fears over a global economic slowdown, and U.S. tensions with allies over trade, Iran and Russia.
Trump said Friday he will raise existing duties on $250 billion in Chinese products to 30% from 25% on Oct. 1. Additionally, tariffs on another $300 billion in Chinese goods, which start to take effect on Sept. 1, will now be 15% instead of 10%.
In addition to the China trade war tensions, the president has maintained tough rhetoric against the European Union. The White House is set to decide in November whether they will impose duties on the autos industry in Europe.
Earlier this year, Trump vowed to set tariffs on imported vehicles and parts from the EU and Japan, but delayed that duty for 180 days in May. The president signed a deal with the EU earlier this month to boost U.S. beef exports.
Trump again threatened to tax European cars Tuesday.
“Dealing with the European Union is very difficult; they drive a high bargain,” Trump said. “We have all the cards in this country because all we have to do is tax their cars and they’d give us anything we wanted because they send millions of Mercedes over. They send millions of BMWs over.”
Experts say that trade conflict with Europe could be much more damaging than the current tit-for-tat conflict with China.
British Prime Minister Boris Johnson told reporters upon his arrival in France that he plans to tell Trump at the summit to pull back from the trade war with China. Johnson said his priorities for the summit “are clearly the state of global trade.”
“I am very worried about the way it’s going, the growth of protectionism, of tariffs that we’re seeing,” Johnson told reporters on the tarmac.
Trump’s first meeting on Saturday was a private lunch with French President Emmanuel Macron.
Macron, who will host the summit, said they were discussing world crises, including Libya, Iran and Russia, as well as trade policy and climate change.
Trump said he anticipated the lunch with Macron would go well.
“We actually have a lot in common, Emmanuel and I. We’ve been friends for a long time. And every once in a while, we go at it just a little bit — not very much. But we get along very well,” he said.
When asked if he would place tariffs on French wines in retaliation for France’s digital services tax, which he previously threatened to do, Trump was noncommittal, but responded that he loves French wine.
Donald Tusk, president of the European Council, said on Saturday that the EU would “respond in kind” if the U.S. imposes tariffs on France over the digital tax plan.
The G-7, which represents the world’s major industrial economies, includes the U.S., Germany, France, Japan, Canada, Italy, and the U.K.
At the summit, world leaders are expected to discuss several foreign policy matters, including Iran and tensions between India and Pakistan, as well as record wildfires in the Amazon rainforest that have spurred global outrage.
Formal talks begin Sunday morning. Many experts expect the summit to end without a joint communique because of clashes on trade.
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