|Bid||0.00 x 0|
|Ask||0.00 x 0|
|Day's Range||79.02 - 79.20|
|52 Week Range||79.02 - 82.71|
|PE Ratio (TTM)||N/A|
|Expense Ratio (net)||0.05%|
Based on comments from key members of the FOMC (Federal Open Market Committee) and the mismatch between the economic performance and signals of a flattening yield curve, it’s tempting to stop depending on the slope of the yield curve (BND) (AGG) as a tool to determine recession risk. It’s important to understand that no financial indicator is foolproof, and the same can be said about the flattening yield curve in the current economic climate. As Fed Chair Jerome Powell said, the indicator might not have relevance in a low-inflation (TIP) environment.
In a recent speech after the March FOMC (Federal Open Market Committee) meeting, Loretta Mester, president of the Federal Reserve Bank of Cleveland, sided with Fed Chair Jerome Powell’s view that a flattening yield (AGG) curve doesn’t signal a weakness.
In a presentation given by James Bullard, president of the Federal Reserve Bank of St. Louis, he said the yield curve could invert by the end of 2018. Although the presentation was four months ago, it still holds true since the yield curve has flattened more than what it was in December 2017. In his presentation, Bullard laid out a few conditions that could lead to the yield curve inversion.
The spread, or the difference between the yields of the ten-year US Treasury and the two-year US Treasury (BND), has fallen below 50 basis points for the first time since 2007. According to Investopedia, “A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.” The most common yield curve traced by the investing and academic communities is the U.S. Treasury (GOVT) curve that plots the yields across various maturities. A normal yield curve is upward sloping, and long-term yields are higher than short-term yields.
The US Bureau of Labor Statistics releases a monthly report that tracks price trends in wholesale markets. Industries from the manufacturing sector (XLI) are surveyed for changes in input prices, and this survey data is used to construct the PPI (Producer Price Index). The survey comprises questions on raw material prices, production levels, and finished goods.
Let's face it, the world of Exchange Traded Funds (ETFs) can be daunting. There are over 1,700 ETFs out there with almost $3 trillion in assets. Sometimes that can mean too much choice. First off, the Vanguard Total Stock Market ETF, which covers the U.S. market, and the Vanguard FTSE All-World ex-U.S. ETF can be good choices to build a stock portfolio. Together these two, low-cost, passive funds own around 5,000 different stocks, with the All-World ex-U.S. fund having 1% or more exposure to 19 different countries including developed and emerging markets.
The Bureau of Labor Statistics (or BLS) released the “Job Openings and Labor Turnover Survey” (or JOLTS) data for February on April 13. The data for this survey is collected by a monthly survey on job openings, the number of new employees hired, the number of employees who have quit, the number of employees asked to leave, and other job separations. The JOLTS report is an indication of the demand for workers in the United States.
The most recent inflation (VTIP) report indicated that core inflation moved closer to the Fed’s 2% target, which could translate into further rate hikes from the central bank. At its recent meeting, the Fed clearly stated that it would continue tightening if supported by economic data. If interest rates and inflation (SCHP) start rising, bond (BND) yields could rise in response and bond prices could fall. US bond yields were largely unaffected by the inflation report favoring higher rates.
US bond markets’ relief after a dovish FOMC statement was short lived as geopolitical tensions took center stage. US bond yields rose along the curve dominated by a sharp increase in yields at the short-end of the curve, which reignited fears of the yield curve flattening. The 2s10s spread has now reduced to 45 basis points and the 2s30s spread has been reduced to a fresh cycle low of 66 basis points.
In the recent weeks, the performance of the US bond markets (BND) has been influenced by trade conflicts between the US and other nations, primarily China (FXI), rather than the underlying economic performance. First, there were the steel and aluminum import tariffs, which were followed by $50 billion worth of tariffs on Chinese imports. The fear of a full-blown trade war reduced risk appetite and increased demand for safe-haven assets like bonds, which further pushed yields lower.
The University of Michigan final consumer sentiment for March was reported at 101.7, up by 1.7 as compared to the final February reading of 99.7. The consumer sentiment index is a forward indicator, as it considers the expectations that consumers have about the economy. Consumer expectations influence their spending decisions, which in turn have an impact on the aggregate demand in the economy.
The non-farm payrolls for March rose by 103,000, which was below the consensus expectation of 193,000 jobs being added and way below the February number of 326,000 jobs. The unemployment rate for March remained unchanged at 4.1%.
The March FOMC meeting minutes indicated that the staff and FOMC members turned bullish on inflation. According to the minutes, all of the FOMC members expected the 12-month inflation (TIP) to increase in the coming months. The FOMC staff review indicated that PCE (personal consumption expenditures) inflation remained below the 2% target.
The ADP March jobs report was published on April 4, 2018. It offered a deeper insight into employment trends across different sectors in the US employment market. ADP and Moody’s analytics prepare this monthly report.
In his annual letter released on April 5, 2018, Jamie Dimon, legendary investor and CEO of JPMorgan Chase (JPM), shared his views on the bond yield, the Federal Reserve’s gradual rate hike process, the potential US-China trade war, and the equity market. The billionaire investor believes the 10-Year Treasury yield could reach 4% in the near term. The sudden heightened improvement in the bond yield was mainly due to the expectation of a faster rate hike process by the Fed.
ADP, a human capital management solutions provider, releases a monthly report on US non-farm employment. Changes to the level of hiring and gains in employment across different sectors in the United States are captured in the report. ADP processes the payrolls of more than 24 million workers in the United States, which gives the organization a unique insight into the US employment market.
Will New Tariffs Push China to React? At the beginning of 2018, there were reports that China was considering stopping buying US Treasuries (GOVT). As China is the largest foreign holder of US debt, any decline in purchases or even selling by China (FXI) could mean huge trouble for the US bond markets (BND).
Will New Tariffs Push China to React? In its arsenal to counter Trump’s aggressive tariffs, China could resort to the devaluation of its currency (CYB) against the US dollar (UUP) as one of its possibilities. Devaluing its currency (CNY) would partially offset the impact of tariffs, as US consumers would be paying less in US dollars to buy Chinese imports.
Jeffrey Gundlach shared his latest view on the equity market, bond yield, and Bitcoin movement in an interview with CNBC’s “Halftime Report” on April 4, 2018. Gundlach thinks that the equity market might end 2018 in negative territory. It’s payback time.” The volatility is signaling that there might be huge shocks for the equity market.
Do We Have the Tools to Combat a Recession? In his keynote delivered at the tenth conference organized by the International Research Forum on Monetary Policy in March, Boston Federal Reserve president Eric Rosengren highlighted US policy tools’ deficiency in combating another recession. Speaking about the monetary policy tools, he said that the current level of US short-term interest rates (SHY) leaves little room for them to be lowered during an economic slowdown.
What Do these 10 Economic Indicators Signal for the US Economy? Until this point, all the economic indicators that form part of the Conference Board Leading Economic Index (or LEI) have been forward indicators. The average consumer expectation for business is not a forward indicator, as it’s derived using expectations rather than any economic indicator.
The US bond markets were relieved last week after the FOMC’s (Federal Open Market Committee) statement regarding its 0.25% rate hike sounded more dovish than expected. This forecast came as a relief to the bond markets, which had been reeling from fears about rising bond yields. The two-year bond yields declined for the first time in many months in response to the FOMC statement. The Vanguard Total Bond Market ETF (BND) ended the previous week at $79.52, depreciating by 0.01% for the week ended March 23.