Stone's Weekly Market Guide - Week of June 17, 2018
Chart of the Week: What does the Fed hike and yield curve flattening mean for stocks? With the Fed raising rates and now projecting two more hikes this year, the yield curve has flattened to the lowest level since the Great Recession. 10-year U.S. Treasuries now yield only 0.37% more than 2-year Treasuries after yielding as much as 2.91% more back in February 2010. Inversion (2-year Treasury yield higher than the 10-year) has an amazing record of forecasting recession well in advance, but stocks have typically continued to rise (sometimes sharply) after the inversion with a median gain of 13.1%. Certainly if the inversion eventually happens, one must raise the odds of a recession and sharp market decline in the following year or two. Bottom line: the flattening yield curve is not a reason to flee stocks.
The U.S. trade spat with China has started to heat up again with tariffs on both sides set to begin on July 6. U.K.’s House of Lords is scheduled to discuss Brexit legislation on Monday. OPEC meets on Friday to discuss possibly restoring their production cuts. The Fed releases the 2018 bank stress tests.
Investors get a read on momentum in the global economy on Friday with June manufacturing PMIs reported for the U.S., Europe and Japan. Seems likely that the trend of good U.S. data will continue, while Europe and Japan are losing some momentum. All measures should remain well above any threat of recession.
The Fed raised rates last week as widely expected. The Fed’s “dot plot” now projects four hikes in total for 2018. See the Chart of the Week for the market implications. As expected the European Central Bank (ECB) didn’t change rates, but plans to end of asset purchases in December and won’t begin rate hikes until the summer of 2019. The Bank of Japan (BoJ) made no policy changes as forecast, but reduced inflation expectations. BoJ seems likely to continue easy policy for a longer period, while the U.S., Eurozone and U.K. are in the process of tightening. More Fedspeak and ECBspeak from the Sintra conference this week. The Bank of England (BoE) meets this week and is expected to hold the policy rate steady. Market participants will be looking for policy clues with market odds of a hike on August 2 hike remaining above 50%.
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