What time is it?
The yield curve may be the pocket watch of economic indicators. It’s been around for a long time and it’s often right, but not always.
The yield curve is the difference between the interest paid on two-year government bonds and 10-year government bonds. In normal circumstances, an investor would expect to earn a higher rate of interest when lending money to a government for 10 years than when lending money for two years because there is more risk associated with lending for a longer period of time.
When the yield curve flattens or inverts, it suggests a shift in investors’ expectations. Financial Times explained:
“The slope made up of bond yields of various maturities has a record of predicting recessions that would make even the savviest econometrician turn pea-green with envy. It is not perfect, but the curve has become flat and inverted – when short-term bond yields are actually higher than long-term ones – ahead of most economic downturns in most major countries since the second world war.”
In the United States last week, the difference between yields on 2-year Treasuries (2.56) and 10-year Treasuries (2.90) flattened. The gap narrowed to 34 basis points (a basis point is one-hundredth of one percent). The change reflects higher short-term rates, courtesy of the Federal Reserve. It also suggests tariffs and trade issues have made bond investors more pessimistic about prospects for U.S. growth, reported The Wall Street Journal.
Globally, the yield curve is inverted. “The average yield of bonds in JPMorgan’s broadest Government Bond Index that mature in seven to 10 years last week slipped below the average yields of bonds maturing in one to three years for the first time since 2007…that indicates that investors have a pretty grim view of where the world economy and equity markets are heading,” reported Financial Times.
We’re keeping an eye on developments in the financial markets and will keep you informed.
Deal or no deal?
Last week opened with heightened trade tensions between the United States and its allies. It closed with the United States imposing new tariffs on $50 billion of Chinese goods. The Chinese declared it was the start of a trade war, reported Financial Times.
U.S. markets largely ignored the potential impact of trade wars on multiple fronts. Barron’s reported the Dow Jones Industrial Average, which includes companies that are vulnerable to tariffs, moved slightly lower. However, the Standard & Poor’s 500 Index shrugged off the possibility of trade wars, and the NASDAQ Composite gained more than 1 percent.
While Barron’s has written the largest risk to the U.S. stock market is the possibility of global trade wars, it appears many investors believe tariffs are a negotiating tactic. Barron’s reported:
“The market’s apparent indifference suggests it doesn’t see these tariffs as the reincarnation of Smoot-Hawley, but just the latest in President Trump’s negotiating tactics. Moving away from his denunciation of Kim Jong-un as “Little Rocket Man” inviting “fire and fury” by missile launches, Trump last week declared the threat from North Korea neutralized. Similarly, many professional investors view the bluster on tariffs as part of Trump’s negotiating tactics, rather than the start of an actual trade war.”
News that monetary policy is becoming less accommodating in certain regions of the world didn’t have much impact on markets either. Reuters reported the Federal Reserve raised its benchmark rate 0.25 percent last week. The European Central Bank is ending its bond-buying program and gave notice it expects to begin raising rates next summer. The Bank of Japan is still easing.
There was a lot of red ink in Asian emerging markets. China’s Shanghai Composite finished the week lower, as well. However, stock markets in Canada and Mexico finished the week higher.
Never before could the Group of 7 (G7) Summit have been mistaken for reality TV.
The generally dignified annual meeting of leaders from the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom (along with the heads of the European Commission and European Council) was a lot more contentious than usual, reported Reuters.
Disagreements about trade were the reason for heightened tensions among world leaders. At the end of May, the United States extended tariffs on aluminum and steel imports to U.S. allies. They had previously been exempted. These countries “account for nearly two-thirds of the [United States’] $3.9 trillion annual merchandise trade,” reported The Washington Post.
Retaliation to U.S. sanctions was fast and furious. Mexico implemented “…a 20 percent tariff on U.S. pork legs and shoulders, apples, and potatoes and 20 to 25 percent duties on types of cheeses and bourbon,” reported Reuters.
Canada imposed $16.6 billion in tariffs on U.S exports of “…steel and aluminum in various forms, but also orange juice, maple syrup, whiskey, toilet paper, and a wide variety of other products,” says Reuters.
The European Union has a 10-page list of goods targeted for sanctions, including bourbon and motorcycles, reported The Washington Post. Complaints that U.S. tariffs are illegal also are being filed with the World Trade Organization.
Difficult relationships with allies are “expected to complicate U.S. efforts to confront China over trade practices that the administration regards as unfair,” reports The Washington Post.
Canadian, Mexican, and U.S. stock markets remained unfazed. Major indices in each country moved higher last week. Some American indices reached new highs. European markets fared less well. Markets may be bouncier this week as investors digest the costs and benefits of trade sanctions.
If the countries were instruments, last week sounded like a fifth grade garage band.
World markets were buffeted by a clamor of good, bad, and unexpected news last week. Events that captured media and investor attention included:
Despite the noise, the Standard & Poor’s 500 Index and NASDAQ forged ahead last week. That may have something to do with valuations. Barron’s wrote, “…the S&P 500…now trades at 16.5 times 12-month earnings estimates, down from 18.2 at the beginning of the year…”
it’s water under the bridge. Water is so common we tend to take it for granted. We drink it, cook with it, wash with it, swim in it, and rarely give it much thought. We should, though, because fresh water is more rare than many people realize. According to National Geographic, “Over 68 percent of the fresh water on Earth is found in icecaps and glaciers, and just over 30 percent is found in ground water. Only about 0.3 percent of our fresh water is found in the surface water of lakes, rivers, and swamps.” Here are some other notable facts about water:
1. Our planet is mostly H2O. However, more than 96 percent of the water on Earth is salt water.
2. The atoms in the water you drink today were around when dinosaurs roamed the Earth.
3. Water is the only compound on earth that can be found naturally in three forms – solid, liquid, and gas.
4. The average person in the United States uses 80 to 100 gallons of water each day, according to the U.S. Department of Interior’s estimates.
5. Thermal power plants generate the majority of the world’s electricity – more than 81 percent – and cannot run without water.
6. ‘Day Zero’ is the day Cape Town, South Africa will become the first major metropolis to run out of water. When it arrives, residents will receive rations of seven gallons a day.
Fresh water may soon be top of mind for everyone because it is rapidly becoming a scarce resource.
McKinsey & Company estimates suggest current water supplies will meet just 60 percent of global demand by 2030. The fraction may be lower in countries like China, India, and South Africa where water supplies are already under stress.
Weekly Focus – Think About It
“To find the universal elements enough; to find the air and the water exhilarating; to be refreshed by a morning walk or an evening saunter…to be thrilled by the stars at night; to be elated over a bird's nest or a wildflower in spring – these are some of the rewards of the simple life.”
--John Burroughs, American Naturalist