So much for all that good news surrounding the G-20 meeting and the Jerome Powell speech on being “near neutral” as the stock market got a surprise when the bond market signaled a warning sign that we haven’t seen since 2007. An inversion occurred in the Treasury market where 5YR yields dipped below 2YR yields. Inversions on the yield curve are rare and they come at the end of a business cycle where a slowdown in the economy is on the horizon. The yield curve didn’t fully invert on the long end but 10YR yields closed only 13 basis points higher than the 2YR yield so we are not far away from something rather significant happening in the bond market. This fact was not lost on the stock market as selling commenced straight into the close on Friday.
Bond markets are always good barometers for the health of an economy so an inversion in Treasury yields combined with credit spreads widening in corporate credit are a sign that the economic cycle may be turning. We won’t know for sure until the stock market finally gives up the ghost and has its watershed moment.
What to look for next week:
- The shape of the yield curve. Will we invert on the long end?
- Lots of people on TV trying to rationalize everything as good news.
- The watershed moment….could happen. Look for a close below 2,600 on the S&P 500 to bring this scenario into play.
Chart of the Week!
Economic & Central Banking Snippets
- Total nonfarm payroll employment increased by 155,000 in November while the unemployment rate remained unchanged at 3.7%. Both the labor force participation rate, at 62.9%, and the employment-population ratio, at 60.6%, were unchanged in November. The change in total nonfarm payroll employment for October was revised down from +250,000 to +237,000, and the change for September was revised up from +118,000 to +119,000. With these revisions, employment gains in September and October combined were 12,000 less than previously reported.
- In November, average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents to $27.35. Over the year, average hourly earnings have increased by 81 cents, or 3.1%. Average hourly earnings of private-sector production and nonsupervisory employees increased by 7 cents to $22.95 in November.
- The Institute for Supply Management said Monday its index tracking manufacturing activity rose 1.6% to 59.3 last month from 57.7 in October. A reading above 50 indicates growth in the manufacturing sector. Manufacturing activity slowed during the prior two months, but a strong November for new orders helped snap that losing streak. The ISM new-orders index hit 62.1, up 4.7 per cent. In October, new orders dipped below 60 for the first time since April 2017.
- Qatar will quit Opec next year, a group that it has been a part of since 1961, the country’s energy minister said on Monday. The move comes amid a deteriorating political situation with its neighbors. (FT)
- Sales of new vehicles in the US slumped in November as buyers shunned small cars, overshadowing stronger demand for SUVs and trucks. General Motors, Ford and other automakers have cut back on production of saloons and coupes, instead focusing on expanding and updating their line-ups of crossovers to protect profit margins and answer a drastic shift in consumer tastes. As part of a broader restructuring, GM announced last week that it plans to idle seven plants globally, including two that build small cars in the US, to reduce excess factory capacity. A higher mix of truck and SUV deliveries lifted transaction prices to a record high of $37,000 per vehicle, up 4.5% year-over-year, according to Ford. Japanese manufacturers Toyota, Honda and Nissan also reported weaker demand for passenger cars as total sales slumped.
- The proportion of US junk bonds trading at distressed levels in November hit the highest level of the year led by retail and restaurants and telecommunications, S&P Global Ratings said on Monday. The US distress ratio — defined by the S&P as “the number of distressed credits divided by the total number of speculative-grade issues” — rose to 7.2% as of November 15, up from 5.6% as of mid-October. S&P cautions that a rising ratio suggests an increased need for capital and signals that defaults could rise.
That is all for now until next week’s Market Update. Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.
Paul J. McCarthy, III
President – Kisco Capital