Today Well the U.S. yield curve inverted on Friday and the financial world is a buzz. Based on the last six instances a recession followed in the next 6-23 months (chart of day). It will be interesting though, as this signal has gained so much popularity that even my concierge mentioned it to me late Friday. If everyone is following or reacts to an inverted yield curve, will that make it impact the economy sooner or if everyone is watching something does it stop working? The yield curve inverted in February of 2006, then the S&P 500 went up another 26%. Also, worth noting other developed economies have experienced recessions without an inverted yield curve and yield curve inversion without recessions. There is no magic bullet for timing the market, but this is not a very encouraging sign. Then again, with a ton of Treasury auctions this week, the inversion may not last….oh wait, it isn’t inverted anymore…phew.
Canada has also joined the U.S. in the inverted yield club. The move along with the dovish stance may keep Poloz on hold for his last 14 months as head of the BoC. Crazy to see that the yield on Canadian 10 year bonds is now 6bps lower than a three month Treasury bill. Clearly, investors are willing to pay up for longer term protection with reinvestment risk on the forefront. Lost in the hoopla of the equity market rebound is the fact that bond investors have also been big winners, with the FTSE TMX Canadian Bond Universe up over 4% YTD.
It’s also worth pointing out that despite negative headlines surrounding the inversion, we’re seeing
no signs of major credit stress. High-yield credit spreads have fallen, and while we may be back in a lower growth environment, the credit market does not seem worried about a recession.
Tough start to the year for Canadian retailers. The retail sales missed on Friday, and receipts have now fallen for three straight months and five of the past six. Perhaps Canadian’s have caught a case of Marie Kondo fever and are feverishly decluttering and only buying items which spark joy. Then again perhaps it is a difficult housing market, regional economic weakness and financial market volatility preventing them from making big purchases. One thing is for certain, the consumer hasn’t been a source of growth for the economy and likely won’t be over the near-term.
The end of the Mueller probe lets us tick one item of our list of potential geopolitical concerns. The conclusion of the long ordeal may not appease everyone, depending on which side of the political spectrum they lean, but it does remove uncertainty, which the market abhors. In addition, it lifts a cloud over the President giving him more leeway to make a better deal with China and push to implement some of the President’s key domestic policy priorities. It’s been a while since we’ve heard of talk of infrastructure spending.
Ben Carlson takes a look at
how often is it a stock pickers market. There is a great chart that shows the % of stocks that outperform the S&P 500 over a rolling ten year period. The cumulative rolling graph highlights when it’s a pickers market, but also when beating the benchmark is toughest.
While concerns over Canadian debt have been hitting headlines after the budget was released, our neighbours to the South posted the largest monthly deficit on record in February. The budget gap was US$234 billion for the month, pushing the fiscal year deficit to US$544.2 billion (nearly 40% higher than at this point last year). Their corporate tax cut package is having an impact on government revenues, but where is the growth? Combine that with heavy spending and of course you have a debt issue. While Jerome Powell is concerned over the size of the debt, some might argue the best time to carry a load of debt is when rates are where they are today.
Overseas, a whole world of confusion is gripping a nation tightly and leaving the future of its entire people in question. Heading into the early hours of the day, the outcome of Thailand’s first post-coup elections remains unclear. This election is widely considered to be a contest between the pro-military bloc that wants their current leader in power and pro-democracy forces fighting to restore democracy to the country. A party linked to the military took a surprise lead in the popular vote, suggesting that the country’s current leader could remain in power. However, many are questioning the credibility of the results, citing voting irregularities and cheating. For now, we can only hope that integrity and fairness prevail.
Diversion:
Why cats always land on their feet. Warning, don’t do this at home.