The S&P500 barely changed last week. In one of the lowest volume sessions of the year, the index crept up 0.16%. Volatility also barely moved; it dipped just a bit to the lowest levels of the year. Boring, sleepy, directionless—these are the words many market pundits are using to describe the action lately. As mentioned here before, the US equity markets still appear to be poised for a major move—-whether it’s up or down is yet to be determined.
In US macro news, the poor performance continues. Sure, housing starts beat expectations, but only slightly. And sure, initial jobless claims are still well under 300,000, but this statistic is always strongest just as recessions are about to start. But the rest of the reports were a mess. The housing market index missed. The Chicago Fed national activity index missed….badly. The PMI manufacturing flash index missed. The Philly Fed outlook was horrible. Existing home sales missed badly. The Kansas City manufacturing index was a horror show. So all in all, there is nothing really good to report in the current US economy.
And this ties into the US Treasury yields and their outlook. While they bottomed (in the current year) in early February and reached another low point in mid April, since then, they’ve been creeping up. From about 1.68% in early February, the 10 year note had risen all the way to about 2.33% in early May. This is a huge move up, after falling for about a year and a half. But then, in later May, yields stopped rising, and started to fall back.
They originally rose, in defiance of the poor economic reports, because Fed officials kept dropping hints that they were going to raise rates despite the weak reports. In fact, many Fed officials simply ignored the poor reports and latched onto the occasional strong report as a justification for raising short-term rates later this year.
But lately, as the abysmal reports kept piling up, the perception in the Treasury markets changed—-if the already moribund economy actually takes a step back and goes into a mild recession, then of course, any talk of raising rates would have to be postponed….indefinitely. And this seems to be reflected in the recent pull back in rates.
Technically, the 10 year is presently a very strong signal that rates are going to fall further. Treasuries were massively oversold in early May, and some sort of reversal was already expected. But now, if the real economy starts to weaken some more, then a drop well below 2.0% for the US 10 year will be a very reasonable target.
The trade—to go long US Treasuries—seems to be setting itself up nicely again. The first time we noted this was in late 2013. The same trade worked for all of 2014. And now, it appears to be on the cusp of working again in 2015.