Afternoon Debrief Aug 14th 2019

Stocks sell off as growth concerns, yield inversion weigh

The stock market is selling off today, fueled by recessionary worries following more disappointing global data and a brief inversion of the 2s-10s yield spread. The S&P 500 is down 2.7%, comparable to the declines in the Dow Jones Industrial Average (-2.7%) and Russell 2000 (-2.6%), while the Nasdaq Composite is down 3.0%.  

Today’s negative disposition formed overnight after China reported its weakest industrial production growth since 2002 for July and Germany followed up with a 0.1% qtr/qtr decline in Q2 GDP. The data essentially threw cold water at yesterday’s relief rally and has reinforced a flight to safety in assets like U.S. Treasuries and gold ($1529.20/oz, +$15.10, +1.0%). 

Most notably, the underlying growth concerns briefly sent the 10-yr yield below the 2-yr yield for the first time since 2007, which is an occurrence that has preceded each recession since 1980. The average length of time between the first inversion and the start of each recession since 1980 has averaged 18 months, with the range being as little as ten months to as many as two years.

In other words, the forward-looking market is siding with history today and is taking a firm risk-off mindset. All 11 S&P 500 sectors are down with the energy (-3.7%) and financial (-3.2%) sectors leading the retreat amid sharp declines in oil prices ($54.35, -$2.75, -4.8%) and U.S. Treasury yields. The information technology sector (-3.0%) is the other sector down at least 3.0%.

Currently, the 2-yr yield and the 10-yr yield are down nine basis points each to 1.58% and 1.59%, respectively. The U.S. Dollar Index is up 0.2% to 97.98. Interestingly, the spread is the same as it was yesterday (one basis point), which is to say that the brief inversion earlier may have added some algorithmic selling pressure. 

Nevertheless, yields are still sharply lower and the prospect of yields continuing to compress has hit bank stocks like Citigroup (61.79, -3.04, -4.7%) and Bank of America (BAC 26.52, -1.21, -4.4%). Separately, shares of Macy’s (16.54, -2.83, -14.6%) have dropped nearly 15% after the company missed earnings estimates and lowered its full-year EPS guidance below consensus.

Evidently, global growth concerns are at the root of today’s orderly, yet sharp, decline. U.S. economic data has not deteriorated like it has overseas, but the market is clearly worried that weakness overseas can soon make its way to the U.S. 

Reviewing today’s economic data, which included Import and Export Prices for July and the weekly MBA Mortgage Applications Index: 

  • Import prices rose 0.2% m/m in July, but declined 0.1% excluding fuel. On a yr/yr basis, all import prices were down 1.8%, versus up 4.8% for the 12 months ending in July 2018, while nonfuel import prices declined 1.3% versus a 1.4% increase for the 12 months ending in July 2018.
  • Export prices were up 0.2% m/m in July. Excluding agricultural exports, prices were also up 0.2%. On a yr/yr basis, all export prices were down 0.9%, versus up 4.3% for the 12 months ending in July 2018, while nonagricultural export prices were down 1.5%, versus up 5.0% for the 12 months ending in July 2018.
    • The key takeaway from the report is that it doesn’t show any inflation, which stands in contrast to the Consumer Price Index for July. Accordingly, it will only serve to confuse the market’s perspective on the Fed’s read of inflation trends.
  • The weekly MBA Mortgage Applications Index spiked 21.7% following a 5.3% increase in the prior week.
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