December 26, 2018
Treasury Secretary Steven Mnuchin has said he wants to conduct an inter-agency review of the current market structure. Specifically, on Tuesday in a Bloomberg interview, Mnuchin said, “a normal trading day now is a 500-point range. A lot of that has to do with market structure, and that’s something we’re going to take a look at.” Mnuchin added that he will ask the Financial Stability Oversight Council, which he heads, to study stock market volatility. The most revealing statement was that he said, “In my opinion, market structure has led to a lot more volatility,” blaming it in part on “high-frequency traders.”
Also interesting was that Treasury Secretary Mnuchin essentially dismissed the significance of a flattening yield curve, saying that, “I don’t necessarily believe that the yield curve at this time is an adequate predictor of future economic issues.” When asked how much he looked at the yield curve as a reliable signal of the economy, Mnuchin replied by saying, “Not at all. Not at all.”
Even more interesting, Mnuchin said that, “I’m a big believer in general that markets are not always efficient,” adding that he looks at a variety of market information, including federal funds futures, the stock market and oil prices. Mnuchin was diplomatic, refusing to address the Fed, but his boss, President Trump urged the Fed to “feel the market’’ and avoid “yet another mistake” by raising rates.
Lastly, Treasury Secretary Mnuchin added that China and the U.S. have had several rounds of talks in the past few weeks. Formal face-to-face meetings are now being scheduled in January, which gave the stock market hope that the Chinese trade spat may finally be resolved in the upcoming months. Mnuchin said that “We’re in the process of confirming the logistics of several meetings, and we’re determined to make sure that we use the time wisely, to try to resolve this” adding that both sides are now focused on trying “to document an agreement” by the March 1 deadline for their current tariffs truce to run out. Clearly, Treasury Secretary Mnuchin went on Bloomberg to try to calm financial markets last Tuesday.
Most Economic Indicators Point Toward Fed Restraint (If They’re Listening)
On Wednesday, the National Association of Realtors announced that existing home sales rose 1.9% in November to a 5.32 million annual pace compared to October. In the past 12 months, however, existing home sales have declined 7%, so a lot more improvement is needed before affordability issues can be resolved. In the Northeast, Midwest and South existing home sales surged 7.2%, 5.5% and 2.3%, respectively, but in the West, existing home sales declined 6.3% as that previously hot market cooled.
The Commerce Department announced Friday that durable goods orders rose 0.8% in November, after a sharp 4.3% plunge in October. A 67% surged in commercial jets and a 31.5% surge for military aircraft caused transportation orders to surge in November. Auto sales declined 0.2% in November and was the only weak transportation component. Excluding transportation, durable goods declined 0.3%. Core capital goods (excluding defense) declined 0.6%, while shipments declined 0.1%. In the first 11 months of 2018, durable goods have risen an impressive 8.4%, but the deceleration in the past couple of months is obvious, especially as autos and housing sales remain lackluster due to higher financing costs.
I should also add that on Friday the Commerce Department revised down the third quarter GDP growth to 3.4% (annual rate) in the third quarter, down slightly from the 3.5% previously estimated. The Atlanta Fed on Tuesday revised down its fourth quarter GDP estimate to 2.9%, down from 3% previously estimated, so it is apparent that GDP growth is slowing as higher interest rates impact key industries.
Finally, energy prices were sliding in tandem last week as both natural gas and crude oil prices have fallen due to weak seasonal demand. Natural gas is very weather-dependent and could spike when the next cold front envelops the Midwest and Northeast. Gasoline inventories naturally build in the winter months due to a lack of demand, but crude oil record production from Russia, Saudi Arabia and the U.S. continue to weigh on many energy stocks. Ironically, energy stocks are forecasted to have the strongest earnings announcement in January and February, so their guidance moving forward will likely be closely scrutinized. Overall, falling energy prices are further evidence that deflationary forces are widespread, and that inflation has fizzled. Longer-term, this lack of inflation should help put pressure on the Fed to stop raising key interest rates, but I’m frankly getting tired of saying that, since they aren’t listening.
The good news is that all (1, 2, 3, 5, 7 and 10-year) Treasury yields meandered significantly lower last week, which I thought would make the Fed “rethink” the long-term course of their interest rates policy. In fact, the 10-year Treasury bond yield hit a 4-month low below 2.8%, which is a good sign that market interest rates remain soft as inflation has fizzled. The Treasury yield curve is now the flattest it has been in 11 years, as a strong U.S. dollar continues to attract foreign capital, pushing Treasury yields lower.
In summary, as I said in my Thursday podcast, the stock market could be up 10% or more in short order in some future week, but we first need a “spark.” Frankly, I thought that Wednesday’s FOMC statement would be that spark, but the Fed did not have the dovish statement that I anticipated. President Trump is furious with the Fed. In fact, Bloomberg reported on Friday that the President would like to fire Fed Chair Jerome Powell, but knows he can’t. Also on Friday, CNBC interviewed UBS’s Art Cashin, where he said that the Fed may not raise key interest rates in 2019 at all and added that there is an outside chance that the Fed might have to cut rates. Frankly, we need more bullish comments from seasoned market veterans like Art (and Warren Buffett, and others) to inspire confidence and spark this next “market melt-up.”
Let’s hope that spark happens right after Christmas!
I hope you had a wonderful Christmas and can look forward to a Happy New Year!