Bond yields

Only 13 bps now in the 2s/10s yield spread. What is the most striking aspect of this move is the extent of it in just two days and how the acceleration came out of nowhere right after a supposed amicable meeting between the US and China. It’s almost as if the bond market screamed out, “It’s too late, the growth slowdown underway can’t be reversed. Tariffs are still with us and now we have to wait around another 3 months.” The price of copper said the same thing yesterday as it rallied early morning by $6 a pound and was back to unchanged by 4pm. With the drop in long end yields, the dollar is down sharply to a 2 week low and gold in turn is rallying to the best level since late July. Gold and silver remain compelling especially if the Fed is near the end of its rate hikes.

I want to say this about leveraged loans and floating rate paper. While LIBOR is at a 10 year high, if the Fed is nearing an end to its rate hike cycle, floating rate debt is going to lose its allure and if growth moderates too, the credit quality of junky paper will really be called into question. Call it a potential double whammy for junk rated leveraged loans. If one wants to remain in floating rate, make sure its investment grade.

We know the US housing market has slowed as it’s been seen in a variety of statistics for a while now. Toll Brothers, a higher end home builder, reported numbers today and they said this in their press release: “In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well publicized reports of a housing slowdown…California has seen the biggest decline. Significant price appreciation over the past few years, fewer foreign buyers in certain communities, and the impact of rising interest rates all contributed to the slowdown.” I say add in the elimination of the SALT deduction too.

With the sharp drop in crude oil, this should reverse in November but for now the October PPI report from the Eurozone saw a gain of 4.9% y/o/y, more than the estimate of up 4.5%. That is the quickest pace in 7 years but take out energy and it was up just 1.5%, in line with the recent trend. As core inflation remains benign in the Eurozone, that is the main focus of markets. The ECB though is 4 weeks from ending the expansion of its balance sheet.

As a fan of the economic liberalization PM Maron is trying to implement in France, I’m glad he’s backing off from the recent fuel tax increases. It was a dumb idea. His approval rating is down to just 23%.

The Reserve Bank of Australia kept rates unchanged at the record low level of 1.5% as expected. In the text of their statement there was really no leaning in any one direction with a pretty balanced assessment of the risks and positives. The Aussie $ ripped higher on the China news yesterday and is higher today along with broad dollar weakness.

AUSSIE $