Pascale’s Perspective

  • Negotiations Take Center Stage

    Pascale’s Perspective

    October 16, 2019

    Both Brexit and US/China trade talks have been sources of uncertainty all year. The news on each has fluctuated between positive and negative which has caused market volatility. This has weighed on bond markets and the Federal Reserve’s outlook (as evidenced by the recent Fed minutes). A case in point was last Friday’s high level US/China meeting and the subsequent announcement of progress towards a trade agreement. This optimism caused the 10 year T to spike about 10 bps and Fed futures rate cut probability dropped from 90% to 70%. This week, the US/China trade talk is less positive (more work needs to be done), while Brexit negotiations seem to be going well in advance of a critical deadline. The 10 year T is at 1.73% (after hitting a high of 1.79% this week), the futures market likelihood of a rate cut is back up to 90%. Inflation: Today’s NY Fed survey of the public’s expectation of long run inflation is at an all time low. It seems that people expect the “new normal” to last a while longer. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Minutes, Powell Remarks Reveal A Divided/Reluctant Fed, “Trick or Treat”

    Pascale’s Perspective

    October 9, 2019

    Highlights of today’s release of the September 2019 Fed meeting minutes: (1) Fed members are wary of futures markets that indicate multiple rate cuts in the next 6 months (note that the CME markets indicate an 93% chance of a rate cut on Halloween). They feel that market expectations may be “ahead” of reality. The danger is that if the Fed doesn’t match the expectation, major selloffs in stock markets will occur; (2) The Fed will start buying treasuries again in order to inject more liquidity into the system in the wake of the recent near meltdown in the overnight lending “repo” markets. However, don’t call it “QE (Quantitative Easing)”, Powell referred to it as an “organic” process that is more “data dependent”, (they will put out fires as needed); (3) Powell discussed “profound changes in the economy” and how existing metrics and reports may be inadequate; (4) Trade disputes are a huge concern, over 25 mentions of trade and tariffs in the meetings, members are concerned about the effect of tariffs on economic activity. US/China trade deal expectations are very low, expect another “kick the can down the road” announcement on Friday, more talks and a delay in the Oct 15 scheduled tariff increases, but no “major breakthrough”. Stay tuned.

  • Markets and the Fed Are “Data Driven” and the Engine Light is On

    Pascale’s Perspective

    October 2, 2019

    This week’s economic reports are pointing in the wrong direction: US Manufacturing dropped to the lowest reading in over 10 years, global trade is slowing to its weakest since 2009 (not helped by today’s tariff announcement between US and Europe), commodity prices and inflation remain below targets (remember the oil spike due to Saudi production interruption? Oil is down $10 a barrell in the last 2 weeks). The US economy’s main engines are manufacturing, service sector and consumers. Therefore, tomorrow’s service sector data (aka the ISM nonmanufacturing index) will be highly watched. The US consumer has remained strong lately. However, look for the Fed to cut rates for sure if weakness in those sectors is reported. The 10 year T hit a recent low of 1.59% today. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Markets Shrug off Politics, Concentrates on Trade

    Pascale’s Perspective

    September 25, 2019

    What a difference a day makes. Yesterday, the combination of a weak consumer confidence report, the potential opening of impeachment hearings and US/China trade uncertainty (the cancelling of the Chinese delegation’s farm tour) caused investors to run into safe assets. The 10 year T dropped to 1.63%. The consumer weakness is especially significant: in recent months manufacturing and corporate investment has been lagging due to trade uncertainty while US consumer activity has been the critical bright spot. With holiday shopping season almost upon us (doesn’t it get earlier every year?), consumer behavior will be critical and closely watched. Today, all that was in the rear view mirror. This morning the markets were seemingly unconcerned about developments in Washington. Instead investors were concentrating on indications that a trade deal is (again) close at hand with news of imminent agricultural purchases of US farm products by China.  The 10 year T jumped to 1.74% as stocks rallied. At GSP we are seeing a glut of fixed rate loan requests as borrowers are rushing to lock in historically low rates. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Divided Fed Cuts Rates as Cash Shortages Roil Overnight Lending Markets

    Pascale’s Perspective

    September 18, 2019

    It’s been a busy week for the Fed.  Overnight Markets:  Monday and Tuesday saw the overnight borrowing rates spike to 10%, up from a normal rate of 2%.  Note that the highly watched rate set by the Fed is the Fed Funds target rate which is enforced via open market operations and other Fed tools but it is not set in stone.  Overnight lending amongst financial institutions is a critical factor in the financial markets.  Banks and other institutions use it to raise cash for daily operations and the loans are secured by Treasuries.  This week’s cash crunch was caused by a confluence of events including: corporate tax payments due Sept 15, large issuance of treasuries last week ($78 billion issued with only $24 billion matured, draining $50 billion of cash from the system), post crisis regulations mandating larger cash reserves held at institutions, etc.  The recent debt ceiling deal and US budget deficit is increasing the supply of treasuries substantially.  High overnight borrowing costs well in excess of the target rate are dangerous as it implies that the Fed doesn’t have control of the rates it is setting.  To its credit, the Fed acted swiftly yesterday and today, injecting over $100 billion into the financial system and overnight rates have calmed down.  Today’s Announcement:  Today’s 0.25% cut was expected and Fed Chair Powell’s press conference was closely watched for signs of future cuts.  Note that the futures market indicates a 42% chance of a cut in October.  The move was by no means unanimous (7-3).  Two voters wanted no cut with the extremely dovish member Bulliard alone advocating for a 0.50% cut.  Powell indicated that future actions are data dependent and stressed that the economy is strong with the exception of trade uncertainty.  It seems some Fed members believe we are at the “Goldilocks” neutral rate now. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Rise as “Fear Trade” Subsides

    Pascale’s Perspective

    September 11, 2019

    Today’s announcement that the U.S. is delaying the next round of trade tariffs continues a trend of positive global news in September (Brexit, Hong Kong, etc).  Yields are up from their recent lows, the 10 year T is at 1.70%. Tomorrow’s ECB meeting and announcement is highly watched as Draghi nears the end of his term and is expected to announce his final round of Quantitative Easing.  There is some “drama” as mixed messages are being received from different ECB factions.  But with Germany tipping towards recession, some accommodative measures are expected. The markets will react based on how the reality matches the predictions already priced in.  Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Global Fears Recede but the Data is Turning

    Pascale’s Perspective

    September 4, 2019

    This week is the opposite of last week, headlines are better but economic reports are troubling.  This week has seen the British Parliament take a major step towards averting a chaotic “no-deal” Brexit and a Hong Kong withdraw of the controversial extradition proposal that caused massive protests.  This should have caused a “relief” selling of treasuries and higher yields.  The ISM Manufacturing index fell below 50% (contraction) for the first time in years.  Is this an aberration or are manufacturers pulling back in today’s volatile trade environment?  The next few manufacturing reports and anecdotal information will be closely watched.  The 10 year T is at 1.46%, just 10 bps above its all time low.  Inflation (or the lack thereof): last week’s PCE was 1.6%, well under the Fed’s 2.0% target; oil prices are dropping and may test the $50/per barrel key technical level.  This week’s employment report (Friday) will be closely watched on the heels of the poor ISM. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Near All Time Lows, Sentiment is Diverging From the Data

    Pascale’s Perspective

    August 28, 2019

    The 10 year Treasury is now at 1.46%, just 10 bps above the all-time low (summer 2016). The bond market continues to ignore U.S. economic reports and concentrate on global fears. Remember when positive Consumer Confidence and Durable Goods reports would drive yields up? Those days are in the rear view mirror as the markets are “obsessed” with gloom on the horizon. US/China trade: the consensus is that China is preparing for a long dispute. Brexit: The suspension of Parliament (suggested by Boris, approved by the Queen) could result in a messy and disorderly split between the UK and the EU, with unforeseen consequences that are hard to quantify. Hong Kong: another potentially volatile situation in a major trading hub. We are seeing many lenders trying to figure out spreads and floors on fixed rate loans. Many are flooring rates near 4.00%, while others are quoting and closing under 3.50% on 10 year money (!), Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Minutes Set Up “Big Friday” in Jackson Hole

    Pascale’s Perspective

    August 21, 2019

    Today’s Fed phrases of the day is a tie between “midcycle adjustment” and “part of a recalibration” which were descriptions of the recent rate cut contained in today’s release of the Fed minutes. Another sentence indicating the rate cut was not part of a “pre-set course” piled on to the realization that the Fed is still watching the data and has not planned a series of rate cuts. The bond market “spoke” by re-inverting the yield curve (the 2 year and 10 year inverted again), indicating fear that the Fed may not act fast enough to ward off a potential recession. Every word and mannerism of Fed Chair Powell’s speech Friday at the annual Jackson Hole symposium will be parsed and analyzed. The bond and stock markets have priced in a September rate cut. However, the bar may be low: if he doesn’t rule out further rate cuts that may be dovish enough to keep markets “off the edge”. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Yield Curve Inverts and “Un-Inverts”, Inflation is Ignored (For Now)

    Pascale’s Perspective

    August 14, 2019

    The classic and most watched measure of yield curve inversion (the 2 year T higher than the 10 year T) occurred this week for the first time since 2005. The 10 year was at 1.623%, the 2 year at 1.634%. Worldwide stock markets plummeted and investors rushed into bonds, sending yields lower and actually bringing the 10 year slightly above the 2 year as of tonight. The 10 year T dropped to 1.58% as of today (note this is only 22 bps above it’s all time low). Markets seem to be painting central banks into a corner – forcing further rate cuts.  The expectation that the Fed will cut 0.25% at its September meeting is now being superseded by thoughts of a 0.50% cut or a “surprise” cut before the next meeting. Interestingly, no one seems to be concerned that CPI posted its strongest 2 month gain since early 2006. This inflationary news should have sent bond bulls running for the exits and dampening Fed rate cut expectations. But scenes of social unrest in Hong Kong (a critical bond trading city) and Argentina are fueling bond rallies in a very “risk off” market. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • The New Normal has Devolved Into A “Race to the Bottom” For Rates and Currencies

    Pascale’s Perspective

    August 7, 2019

    Worldwide bond yields are plummeting as fear grips the market.  The 10 year T is at 1.71%, after dropping to a 3 year low of 1.60% today.  Last Tuesday it was at 2.08%, the day before the confusing and market disappointing Fed announcement.  That seems like ages ago after a tumultuous week featuring one of the market’s worst fears: trade disputes both actual and threatened.  A pillar of the post Cold War world economic order has been free trade and unmanipulated.  Interestingly, the last time the 10 year was below today’s yield was in the aftermath of the Brexit vote.  The specter of major economies manipulating currencies was triggered this week as China allowed the yuan to drift beyond a key level in relation to the US dollar.  Today, 3 significant central banks (Thailand, India, New Zealand) cut rates significantly ranging from 0.25% to 0.50%.  This will devalue those currencies as smaller countries feel they need to keep up with China and the US.  Will a worldwide devaluation of currency finally trigger inflation? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Markets Roil on Expectations Unmet

    Pascale’s Perspective

    July 31, 2019

    Today’s quarter point rate cut (the first since 2008) was expected and already priced in to the markets. However, markets had priced in more than just one cut. During Fed Chair Powell’s press conference, equity markets plunged, reminiscent of the 2013 Taper Tantrum. Why? Fed Chair Powell strongly implied “one and done” by stating that this is a “mid-cycle rate adjustment”, as opposed to one in a series of rate cuts. The prospect of no more rate cuts this year sent markets reeling. It seems that asset values are very likely overpriced and the thought of pricing “mark to market” spooked markets that are clinging to the punchbowl and hoping that another rate cut is forthcoming. The 10-year Treasury closed at 2.01% and the 30 day LIBOR is at 2.23%. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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