U.S. resilience meets the ECB buzzsaw
EDITOR'S NOTE
If you want to believe the sky is falling, you won't want to hear this.
The U.S. data came in strong again this morning. Jobless claims have barely budged; the regional Philadelphia and New York manufacturing surveys continue to shake off their earlier slumps; retail sales were super strong, helped by--no joke--Amazon Prime Day. But that wasn't just a quirk; the retail gains were broad-based, putting consumption on track for another 3% quarter.
And there's more! Productivity is up 1.8% on the year now. Hourly compensation is running a nice 4.3% over the past four quarters, per economist Stephen Stanley. That's great news for workers (although not so much for profit margins) and should help dispel some of the deflation fears out there.
All of this was enough to push the 30-year Treasury yield back above 2%, which itself feels like a ridiculous thing to write. Back above 2%?! It had never in U.S. history slipped below that level until last night. And we couldn't even hold it. We're back below 2% as of this writing.
Why? Well, something about China threatening "countermeasures" this morning against the U.S., even though a different official later said "we hope the U.S. side will meet China halfway." Everyone's on edge about Hong Kong, understandably, although their market rebounded today. U.S. factory output slid last month, the one downbeat piece of data this morning, although that's definitely a "known known" in terms of the economy.
But then you have the European Central Bank's Olli Rehn out there saying they have a "very strong package" of stimulus measures ready for their September meeting, including rate cuts and "substantial and sufficient" bond purchases. Bond purchases!!
And now the German 10-year yield has slid to -0.7% (!!!), France is at nearly negative half-a-percent, and Spain is about to turn negative. That's dragging our yields lower again, as it has all year.
Want a hot trade? Check out the TLT, a proxy for long-dated Treasuries. It's up 20% this year! That's what the flip side of sinking yields--surging prices--gets you. As BMO's Ian Lyngen points out, even at these low levels, the 10-year has 14% upside, and the 30-year 44% upside, before yields hit zero--"and perhaps more from there" if they turn negative. That's what traders are drooling over.
Don't even ask me what it means for long-term, hold-to-maturity, income-reliant investors, however. It's like what Dynamic's Noah Blackstein said on Power Lunch the other day, regarding negative-yielding sovereign debt: "Apparently 'risk-free' now means a small loss [guaranteed], with the potential for complete loss." Even $60 billion of U.S. corporate debt has negative yields now...and counting.
It all makes my head hurt. But we'll sort through it at 1 p.m. See you then!
Kelly
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