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“Democracy is beautiful in theory; in practice it is a fallacy.” – Benito Mussolini
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The mid-July seasonal headwinds have come in right on schedule this year. Earlier this month, we noted that the three-month period from mid-July through mid-October has historically been the weakest three-month period of the year, and since its closing high on 7/16, the S&P 500 is down over 4% in a little over a week! We usually stress the inadvisability of investing based solely on seasonal trends, but as the last week has illustrated, these trends are important to be aware of.
This morning, futures are lower again as international markets have been under pressure overnight and this morning. Japan was down over 3%, and major European benchmarks are down over 1%. Crude oil and gold are also firmly lower with declines of well over 1% while copper is on pace for its ninth down day in a row. The only asset trading higher is treasuries where yields are firmly lower.
It’s a big day for economic data this morning as we just got the first read of Q2 GDP, Personal Consumption, and PCE. In addition to those reports, weekly jobless claims, and Durable Goods were also released. GDP and jobless claims came in better than expected, and while headline Durable Goods Orders were much weaker than expected, taking out Transportation, the report was better than consensus forecasts. Additionally, the GDP Deflator rose less than expected, so overall, this was a good batch of data. The only other report on the calendar for today is the KC Fed Manufacturing report at 11 AM Eastern.
As equities have come under pressure in the last several days, yields have declined with the two-year yield trading down to its lowest level since February 1st and the 10-year yield in a well-defined short-term downtrend since its yield peaked at 4.70% in late April. This morning, the yield is down to 4.22%, or nearly 50 bps below that peak.
As shown in the chart above, 2-year yields have been falling at a faster pace than the 10-year yield as the market prices in rate cuts in the months ahead. As a result of that faster decline at the short end of the curve, the spread between the two has narrowed quickly. The 10-year vs 2-year yield curve is now inverted by less than 15 basis points (bps), the flattest it has been in more than two years.
At the very short-end of the curve, we’ve also seen some large moves in the last two weeks. The chart below shows the 3-month US Treasury yield plotted with the mid-point of the Fed Funds target rate. As of this morning, the 3-month yield is now further below the mid-point of the Fed target rate than it has been at any point since the Federal Reserve’s last rate hike of the cycle last July.
