That it now sounds like we’re a day or two away from a debt deal and also after some Fed members teasing us with another rate hike or if not, at least taking away the markets expectations of rate cuts, the 2 yr Treasury yield is at the highest level since where it stood before the SVB weekend at 4.38%. On Wednesday March 8th the 2 yr yield reached its recent peak at 5.07%, by Friday it was at 4.59% and closed that Monday at 3.98%. The 10 yr yield currently at 3.74% compares with 3.99% on that Wednesday in March, 3.70% that Friday and which fell to 3.58% on Monday March 13th. Yields are moving higher too in Europe and closed up in Asia.
The 2 yr Treasury remains very attractive and I’ll say again that I can argue for a 3% 10 yr yield but also one at 4.5%. For those who just want to predict the 10 yr by just looking at inflation and growth, yes maybe we get to 3%. But I’ll argue again that there are just too many other variables that could send the yield to 4.50% and not for good reason. On the likely debt deal within days, the US Treasury is about to flood us with Treasury paper at the same time the Fed, foreign central banks and the banks are just not interested in buying. On the other hand we definitely have retail, pension funds, and insurance companies that are licking their lips at these yields. The net result is a clearing price that I just don’t have any confidence to call. I just don’t know how it will go when the BoJ widens YCC again, which they will. I’m not confident in trying to call how ECB QT will go either.
It was 2002 when former VP Dick Cheney told then Treasury Secretary Paul O’Neill that “Reagan proved deficits don’t matter.” With a current budget deficit as a % of GDP at 7% even before a recession has technically begun at the same time the US government is now crowding out the private sector as money shifts from bank deposits to Treasury money market funds, we’re about to find out if they now do matter. I’ll argue they now do, big time. Below is a chart of the dollar amount in money market funds and the amount of bank deposits so you can visualize the crowding out going on.
2 yr Yield
Money Market Assets in white, Bank Deposits in orange
Lowe’s in their earnings release said “we are updating our full-year outlook to reflect softer than expected consumer demand for discretionary purchases.” They are also citing lumber deflation.
DICK’s Sporting Goods beat both headline and bottom line but reaffirmed full yr guidance. In their release they said “Even as consumers face macroeconomic uncertainties, our athletes have continued to prioritize sport and rely on DICK’s to meet their needs, and we continue to gain market share.”
We might be finally about to see some relief on the retail price of a new car. Wards yesterday talked about a “month end surge in deliveries” and that inventories continue to improve. This was joined by comments from the CEO of Ford yesterday that said the company is budgeting for a 5% cut in prices. The caveat though with that 5% comment was that it wasn’t clear if that was just for EV’s as they compete with Tesla’s price cuts or also includes ICE cars. Keep in mind too as inventories on dealer lots normalize, the auto sector was one of the few industrial bright spots in Q1 as the inventory build took place.
Shifting to the May PMI’s, Japan’s improved by 2 pts m/o/m to 54.9 with services rising to 56.3 from 55.4 and manufacturing getting back above 50 at 50.8 from 49.5. That composite figure is the best since 2013. S&P Global said “Service providers continued to report strong growth momentum with a renewed record increase in business activity, while manufacturers indicated an improvement in operating conditions for the first time in 7 months, with output and new orders returning to expansion territory for the first time since last June. Firms were also optimistic about the outlook for activity in the near and medium term.” I’ll add, while the China reopening has been spotty, the fact that they are at least open will benefit Japan’s economy.
Australia’s composite services and manufacturing PMI for May in contrast fell to 51.2 from 53 as manufacturing was unchanged at 48 and services slipped by almost 2 pts to 51.8. S&P Global referred to the m/o/m drop as “a small retracement from the strong April outcome reinforcing the view that overall economic activity in Australia is holding up well as we enter the winter months.” That said, “The recent strength in services results stands in contrast to manufacturing.”
The May Eurozone PMI was mixed as manufacturing continued to soften to 44.6 from 45.8. Services remained strong but a bit less so at 55.9 vs 56.2 in April. Combining the two saw their composite index fall to 53.3 from 54.1. S&P Global said “The resulting outperformance of services relative to manufacturing was the widest since January 2009.” Germany’s manufacturing PMI fell all the way down to 42.9 from 44.5 while France is at 46.1 vs 45.6 in April.
The same story was seen in the UK with its manufacturing PMI falling to 46.9 from 47.8 while services came in at 55.1, though down .8 pts m/o/m. The composite index was 53.9 vs 54.9 in April “with the expansion continuing to be driven by surging post-pandemic demand in the service sector, notably from consumers and for financial services, with hospitality activities buoyed further by the Coronation.” Service prices in turn are remaining high. In contrast with manufacturing, “many companies are winding down their inventories, exacerbating the downturn in demand and driving both output and prices lower.” The net result, same as in the Eurozone, “The UK is seeing a tale of two economies.”
As stated earlier, yields are higher in Europe but the euro is lower with broad dollar strength. Stocks are mostly down in the region.