When is high too high? The U.S. stock market has been a real champ at sailing past the prospect of higher interest rates to new high after new high. But the march of the yield on the 10-year U.S. Treasury has led to a pause for thought among traders and investors. The yield on the 10-year climbed to 2.71% this morning.
Today somebody in the Trump administration decided that the idea of the world’s biggest debtor nation talking down the value of its currency–as Secretary of the Treasury Steve Mnuchin did yesterday at the World Economic Forum in Davos–might be a bad idea. Overseas investors worried about a decline in the value of their dollar-denominated Treasuries would be certain to demand higher yields just as the Treasury was scheduled to sell $1 trillion in new Treasuries in 2018. So this afternoon President Donald Trump told CNBC that he favored a strong U.S. currency.
The dollar continued its fall today after European Central Bank president Mario Draghi voiced minimal concern over the rise in the euro. That currency topped $1.25 for the first time since 2014. The MSCI Emerging Markets Currency Index jumped 0.9%, its biggest leap in more than a year.
Just what an already jittery bond market needs: reports that senior Chinese officials reviewing the country’s purchases of U.S. Treasuries have recommended slowing or halting that buying. It’s not clear from these reports whether the recommendation is based on fears of a China/United States trade war, on weakness in the U.S. dollar, on readings of rising supply as the U.S. deficit is set to expand or other factors.
The Treasury yield curve continues to get flatter. Today, November 27, the gap between the yield on the 2-year Treasury, at 1.74%, and the 10-year Treasury, at 2.32%, narrowed by another basis point to 58 basis points. (100 basis points make up 1 percentage point.) In the last year the yield on the 10-year Treasury has dropped by 3 basis points while the yield on the 2-year note has climbed by 62 basis points. Frequently, a narrowing yield curve is a sign that we’re headed into a recession. But not this time, in my opinion.
Goldman Sachs released its seven top trade themes for 2018 yesterday, November 17. Investors and traders always receive Goldman’s trading ideas with a high degree of skepticism, knowing that the bank’s traders are perfectly comfortable trading against the expectations that these themes generate. And there’s also the belief that what Goldman is really interested in is not tradable themes but volatility.But still, I think yesterday’s release is an important market event–because Goldman is now the first big voice willing to break with the current market consensus that the Federal Reserve will raise interest rates just twice in 2018.
The Institute for Supply Management’s manufacturing index for June released this morning climbed to 57.8 from 54.9 in May. That was the highest level of the index, where anything above 50 signals expansion, since 2014. Economists surveyed by Briefing.com had projected a slight uptick to 55 for June.Â
It’s a classic risk off market today as of 4 p.m. New York time. All the safe havens are up. The yen is ahead 1.2% to 109.65 to the dollar, breaching the 110 level for the first time since November. Gold is 1.73% higher to $1275.60 an ounce. The 10-year U.S. Treasury is up and the yield is down to 2.30%. And riskier asset classes are down. Modestly.
The jump in the price of gold and the even huger spike in the prices of gold mining stocks tells us something really important about how the financial markets see the Federal Reserve’s action and rhetoric on Wednesday, March 15. Gold for April delivery climbed 2% in New York after the Fed raised its short-term benchmark interest rate by 25 basis points. The VanEck Vector Gold Miners ETF (GDX) roared ahead 7.69%
