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The FOMC’s toolbox is not only beyond imagination but it’s like Bullwinkle’s magical Top Hat that the Fed Chair can reach into and pull out a sizeable surprise. The Bond Market Review recalls that Jerome Powell could not be persuaded (or pressured) into lowering rates and providing stimulus before Covid–19. Now he makes former Chair Ben Bernanke look as if he only had a toy helicopter. Stock and bond investors find themselves in the unique position of being able to ignore valuations and fundamentals and rest on the Fed’s promise to use all their tools. It’s one more of those many things that seem to work – until they don’t. We’re not fighting the Fed, we’re relying on them! In the past few weeks, the Fed started buying individual corporate bonds beyond their ETF purchases. Speculators were scrambling to buy Hertz stock just after their bankruptcy. Hertz had been seeking to sell $500 million in stock but abandoned that idea to instead seek loans. Can it be long before the Fed also buys individual stocks???

Powell testified before the Senate Banking and House Financial Services Committees this week and voiced his concern over fiscal policy ending too soon. He said: “I would think that it would be a concern if Congress were to pull back from the support that it’s providing too quickly.” Much like Powell was resistant to President Trump over the past few years, Representative Patrick McHenry (R) told the Fed Chair: “Monetary and fiscal policy are two very different things. I would urge you and the leadership of the Fed to stick to monetary policy.”

Powell said that even after large numbers return to work over the coming months that we would be “well short of where we were in February.” He said: “The levels of output and employment remain far below their pre–pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.” He also repeated the ECB mantra of ‘whatever it takes’ in reassuring that the FOMC policy makers are “committed to using our full range of tools to support the economy in this challenging time.” Powell has confidence in the Fed’s tools but uncertainty about the results. His message supported the Fed’s view that recovery would be slow and require low rates into mid–2022. However, incoming data does as well. Some is very good while other results point to a longer recovery. FRB Cleveland President Loretta Mester said “this is such a deep deep shock to the economy that it’s going to need support and very accommodative monetary policy to get us back” where we want to be.

St. Louis’ James Bullard said we’re not “out of the woods” but April could have been the worst month, and behind us. Richmond’s Thomas Barkin also affirmed the long–recovery outlook saying: “The pace is going to be slow.” He said the “path of the economy depends on the course of the virus”, and it would depend on people being comfortable going back out to shop and eat. Philadelphia’s Patrick Harker said 2021 would be a growth year but not enough to return us to early 2020. He said some of the jobs lost because of the virus may never return and others might return in a “radically different form.”

President Trump and White House Economic Director Larry Kudlow are more optimistic. Kudlow said: “There’s a very good chance you are going to get the V–shaped recovery.” Speaking on CNN, he predicted: “The unemployment rate will fall, and 2021 is going to be another solid, solid year.” While the BMR focuses on cycles and the economy, it’s crucial to be aware that social unrest and the drums of war could provide enormous headwinds to global recovery. While we’re all painfully aware of domestic trials, Chinese and Indian soldiers fought on their disputed border for the first time in nearly 50 years – with loss of life, and India then moving to boycott Chinese goods. Chinese fighters have been buzzing Taiwan. NORAD F–22 jets were sent to intercept a Russian bomber near Alaska in the 8th such incident this year – and the 4th in a week. North Korea destroyed a liaison office designed for joint Korean talks and threatened “explosive justice far beyond imagination” saying their “military’s patience has run out.” Leader Kim Jong Un’s sister said to “expect something big.” Turkey attacked Kurds in northern Iraq this week and has recently been escalating disagreements with Greece. That’s just a partial list …

Looking Ahead

• Equity cycles show a trend–change low due near June 22nd, a high near June 24th, and a low near July 1st.

• Bond cycles show yields remaining low until a greater trend–change window near July 24th/28th.

• Happy Father’s Day this Sunday (06/21). I sure miss mine!

Treasuries, Agencies, and MBS

Yields have a low due on June 29th, interim highs near July 8th and July 20th, and a more important window for lows near July 24th/28th. Last week, yields fell by 1.5, 13.5, 19, and 21 bps for the 2, 5, 10, and 30–year Treasury sectors. Much of the gain in Treasuries came with ‘flight to quality’ last Thursday as the Dow Industrials dropped by 1,862 points. Yields for those sectors were higher by .5, .5, .5, and 2.5 bps this week after being much higher on Tuesday following the promising Retail Sales numbers.

In April, foreign U.S. debt holdings dropped to a 4–month low due to the largest sales (outflow)since August 2019. $128.4 billion came out of long–term U.S. debt and a net $125.3 flowed out of U.S. assets. With oil prices dropping, Saudi Arabia sold $60 billion in U.S. Treasuries. The Fed’s balance sheet just declined for the first time since the virus, dropping from $7.169 trillion to $7.095 trillion. The $74.25 billion drop was the largest in 11 years (to May 2009). Individual corporate bond and ETF holdings rose to $7.03 billion from $5.5 billion last week.

MBS spreads (FNMA 30–year 2.5%) narrowed about 5 bps last week. The Treasury reopened its May 2040 maturity to add $17 billion 20–year notes at 1.314% on Wednesday (06/17). Demand was considered very good and rose from last month’s first offering of 20–year Treasuries since 1986. The buying group that includes foreign central banks accounted for 61.6% of the offering versus 60.7% in May. Next week, the U.S. Treasury will auction $46 billion 2– year notes on Tuesday (06/23), $47 billion 5–year notes on Wednesday (06/24), and $41 billion 7–year notes on Thursday (06/25).

6/12/20
Treasury Yield Curve

2-Year: 0.194%

5-Year: 0.329%

10-Year: 0.705%

30-Year: 1.458%

Weekly Yield Change -.015%

-.136%

–.191%

–.209%
Support 0.210/ 0.230/ 0.250/ 0.279

0.324/ 0.339/ 0.354/ 0.368

0.725/ 0.745/ 0.765/ 0.785

1.523/ 1.552/ 1.580/ 1.610%

Targets

0.171/ 0.154/ 0.140/ 0.131

0.309/ 0.294/ 0.279/ 0.265

0.686/ 0.665/ 0.646/ 0.625

1.461/ 1.431/ 1.402/ 1.372%

Economics

The Leading Index rose a record 2.80% in May but that followed the largest drop in nearly 60 years. April’s decline was revised lower (more negative) from –4.40% to –6.10%. Following a 14.70% decline in Retail Sales in April, they surged 17.70% in May. We wonder what they would have been without stimulus, but that’s why the government supplied it! We spoke to numbers last week. The cumulative effect is still key. As of April, sales were off 22.1% versus January and, even after the gain, May sales were 8.3% off January’s pace. However, it was still great data. Ex autos, sales rose 12.4%. The Atlanta Fed’s GDP–Now forecast improved from –48.4% last week to –45.5% (on Retail Sales & Housing Starts).

Initial Jobless Claims exceeded 1.5 million for a 13th week but were lower for an 11th week. The 1.508 million jobs lost last week set the 13–week total at roughly 45.7 million and was worse than the 1.29 million expected. The 58K drop to last week’s 1.566 million was the smallest since the lockdown began. Continuing Claims fell from 20.606 million to 20.544 million. Given the continuation of losses and admitted errors in the May jobs report, it will be interesting to see how the revisions and possible June gains pan out in the next report. One report said Americans had missed or skipped payments on over 100 million student, auto, and other loans since the lockdown began.

Bloomberg Consumer Comfort rose for a 4th week, improving from 38.7 to 40.2 for the best 4–week increase since July 2004. Expectations rose the most since February 2019, improving 9 points (from 29 to 38). University of Michigan Sentiment rose from 72.3 to 78.9, the most since 2016. Current Conditions rose from 82.3 to 87.8 and Expectations improved from 65.9 to 73.1. Manufacturing saw significant gains in outlook. Empire Manufacturing (New York) rose from –48.5 to only –.2! The Philadelphia Fed Business Outlook rose from –43.1 to 27.5!

Industrial Production was expected to rise by 3.00% in May but only rose 1.40%. Worse though, April was revised from –11.20% to –12.50%. Capacity Utilization rose from 64.00% to 64.80% but undershot expectations for an increase to 66.90%. Business Inventories fell by 1.30%. Import Prices rose 1.00% and were .80% higher to a –6.00% annual decrease. Export Prices rose .50% – also rising .80% to an annual –6.00%.
Homebuilder outlook (NAHB Housing Market Index) rose by 21 points in June (from 37 to 58) indicating some optimism (over 50). Housing Starts were expected to rise by 23.50% but only increased by 4.28% to 974K annual units. Building Permits rose 14.45% to 1,220K annual units, under but much closer to the 16.80% forecast.

The Current Account Balance for Q1 is set for Friday. Monday (06/22) brings the Chicago Fed National Activity Index and Existing Home Sales for May. Tuesday follows with New Home Sales for May and the Richmond Fed Manufacturing Index. Wednesday gives us MBA Mortgage Applications (which rose by 8.00% last week) and the FHFA House Price Index. Thursday is loaded with the merchandise trade deficit for May (Advance Goods Trade Balance), Wholesale & Retail Inventories, an update on Q1 GDP, jobless claims data, Orders for Durable & Capital Goods, and Kansas City Fed Manufacturing Activity.

Equities

Despite some wild action last week, equities settled into a trading range over the past few days and pushed the next low cycle out from today to June 22nd (Monday). They still show a bounce up into the 24th, and a more important low near July 1st. For the record, we now expect the best buying opportunity to occur near August 17th. Last Thursday (06/11) was the 4th worst loss of the year for the Dow Industrials at 6.90% or 1,862 points. Though stocks recovered 1.90% on Friday, it was also the 4th worst weekly loss this year at 5.55%.

Last week, the Dow lost 1,505.44 points or 5.55% to close at 25,605.54. It’s up 1.85% this week. The Nasdaq fell 2.30% and is outperforming the other major indices with a 3.69% gain this week. The S&P dropped 4.78% but is 2.43% higher this week. The Dow Transports tumbled 8.01% but have risen 1.38% this week. Bank stocks were one of the weakest sectors in falling 10.81%. They are 1.28% better this week.

Dow:

Nasdaq:

S&P:

Resistance: 26,490/ 26,817/ 27,145/ 27,476

10,084/ 10,185/ 10,286/ 10,389

3,153/ 3,209/ 3,265/ 3,323

Support:

25,843/ 25,524/ 25,205/ 24,889

9,885/ 9,786/ 9,688/ 9,591

3,097/ 3,042/ 2,987/ 2,933

Other Markets

Crude Oil should be trending higher into July 14th – with dips into June 25th and July 7th. Last week, Crude lost 8.32% – though it was 7.12% higher through today. Commodities lost 3.35% but rebounded 2.04% so far this week. Gold gained 3.17% but lost .26% through today. The U.S. Dollar gained .40% and has added .10% this week. The Japanese Yen rallied 2.02% and is up another .38% this week. The Euro lost .32% and is .45% lower this week. Corn dropped .38% last week and gained .30% through today. Cotton lost 3.16% but rose 2.22% so far this week.

“To imagine the unimaginable is the highest use of the imagination.” Cynthia Ozick (A true Fed quote…)

“Holding onto anger is like grasping onto a hot coal with the intent of throwing it at someone else. You are the one who gets burned.” Ancient Chinese Proverb

Doug Ingram, Financial Economist

Additional Information is Available on Request