Saturday, March 23, 2019

Two big words from yesterday- not "March Madness", but "RATE INVERSION"

Earlier this week, the Federal Reserve was sending signals that the US economy was slowing down quickly from the sugar high of the GOP Tax Scam in 2018, and I noted that we were nearing a situation that has predicted every US recession in the last 40 years.

Well, that situation arrived on Friday, and was accompanied by a 460 point drop in the DOW.
A closely watched section of the Treasury yield curve on Friday turned negative for the first time since the crisis more than a decade ago, underscoring concern about a possible economic slump and the prospect that the Federal Reserve will have to cut interest rates.

The gap between the 3-month and 10-year yields vanished on Friday as a surge of buying pushed long-end rates sharply lower. Inversion is widely considered a reliable harbinger of recession in the U.S. The 10-year slipped to as low as 2.439 percent.

U.S. central bank policy makers on Wednesday lowered both their growth projections and their interest rate outlook, with the majority of officials now envisaging no hikes this year. That’s down from a median call of two at their December meeting. Traders took that dovish shift as their cue to dig into positions for a Fed easing cycle, pricing in a cut by the end of 2020 and a one-in-two chance of a reduction as soon as this year.

“It looks like the global slowdown worries have been confirmed and the market is beginning to price in Fed easing, potential recession down the road,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. “It’s clearly a sign that the market is worried about growth and moving into Treasuries from riskier asset classes.”
Uh oh...

One area that might benefit from the plummeting interest rate environment is the US housing market, which became increasingly shaky over 2018 as higher prices and rates made housing less affordable for many. Data that came out on Friday indicated that these trends reversed in February.
The National Association of Realtors said Friday that existing homes sold at a seasonally adjusted annual rate of 5.51 million last month, a decisively sharp rebound from a pace of 4.94 million in January.

The burst in sales points to the housing market regaining the momentum that it lost in the middle of 2018, after a spike in rates for home loans caused sales to slow. The February sales figures point toward growth in sales of homes priced between $250,000 and $500,000, a range that is generally affordable to middle-class families.

“This was fueled principally by an improvement in affordability resulting from a combination of slower house price gains, lower mortgage rates and more rapid wage growth,” said David Berson, chief economist at Nationwide Mutual Insurance.

Still, existing-home sales are down 1.8 percent from a year ago because of the severity of last year’s slowdown. But 30-year mortgage rates have since tumbled after peaking in early November at roughly 5 percent, helping sales to recover as that average has fallen to 4.28 percent this week, according to mortgage buyer Freddie Mac.
That jump in housing sales was one of two reasons that the Atlanta Fed bumped up its projected rate of growth for Q1 2019 yesterday, from 0.4% to 1.2%.

About 1/3 of that recent improvement is due to the improved housing figures in the last week. But if you dig into the Atlanta Fed's calculations, about 2/3 of that is due to inventories continuing to stay on the shelves, despite having inventory builds in the last 2 quarters. Which should make you wonder when orders stop being made because they're not necessary to have product ready to go.

Along those lines, another trigger for Friday’s rate inversion was a new report showing that the US’s growth in manufacturing was at its lowest levels in 2-3 years.
The seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™ ) 1 registered 52.5, down from 53.0 in February and the lowest reading since June 2017.

Softer rises in output, new orders and employment all weighed on the headline PMI in March. The latest expansion of production volumes was only modest and the least marked since June 2016.

A number of manufacturers commented on a cyclical slowdown in client demand. Reflecting this, new orders increased at the weakest rate for just under two years in March.

Growth of input buying was the slowest since May 2017, with survey respondents citing the need to adjust purchasing volumes to softer demand conditions. This helped alleviate pressure on supply chains, with lead-times from vendors lengthening to the least marked degree for almost one-and-a-half years.
So add it to the pile of evidence of economic softening that has come up over the last few months.

Also, the IRS released its latest updates on tax refunds, and they still continue to lag behind last year’s totals, down $5.6 billion as of March 15. As we have seen throughout much of this tax season, the refund amounts are basically the same as FY 2018, but the lower totals are due to 1.8 million fewer Americans getting refunds at this point of the year. Those gaps in amounts and number of refunds between 2019 and 2018 have persisted for the last month.

Yes, lots of us may have missed these bits of economic information because we were busy spending numerous hours socializing and watching hoops yesterday (guilty). But the real Madness may just be starting when it comes to the US economy and financial markets in the near future, and it's time to look to see if the lack of refunds and slowing economy starts to have its effect on many a Main Street in this country as the 2010s end.

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