KSTR - Weekly Commentary: Greatest Threat
2024-06-24 08:20:00 ET
Summary
- Ten-year Treasury yields traded this week at the lowest level since March.
- The market closed Friday pricing a 4.85% policy rate at the Fed’s December meeting, implying two rate cuts (48 bps).
- For the Week:The S&P 500 added 0.6% (up 14.6% y-t-d), and the Dow rallied 1.5% (up 3.9%).
Let’s get started with domestic. Ten-year Treasury yields traded this week at the lowest level since March. Markets have taken this as confirmation of economic weakening. The market closed Friday pricing a 4.85% policy rate at the Fed’s December meeting, implying two rate cuts (48 bps).
Mohamed El-Erian is emboldened, penning his “The Fed Needs to Cut Sooner Rather Than Later” piece this week for the Financial Times: “The stronger argument for the importance of timing relates to the state of the economy. Mounting, though not yet universal, data signal economic weakening, including deteriorating forward-looking indicators.”
As for forward-looking indicators, I remain skeptical that the economy will meaningfully weaken so long as financial conditions remain extraordinarily loose. Corporate debt issuance remains exceptional. Meanwhile, state and local governments have joined the party.
June 20 – Bloomberg (Joe Mysak): “The municipal bond market this week soaked up a record 27th deal of $1 billion or more, with overall borrowing accelerating at a torrid pace. Debt sales are being driven in part by a decline in borrowing costs over the past few weeks… Top-rated borrowers can borrow money for 10 years at about 2.80%... That’s down from 3.09% at the end of May. The previous annual record for so-called mega-deals was in 2020, when 26 were sold, totaling $46.49 billion… Through Wednesday, 27 muni megadeals totaling $42.96 billion have been sold. So far this year, states and localities have sold $221.4 billion in long-term debt, 42.8% ahead of last year’s pace.”
This “torrid pace” of borrowing will boost spending. Markets disregarded the strong Services ISM report from a couple weeks back. Strength was corroborated by Friday’s stronger-than-expected PMI data. My analysis weights the much larger service sector above manufacturing activity, but it’s worth noting that the Manufacturing PMI rose to the highest level (51.7) since March. The Employment component gained to the strongest reading since September 2022. At 55.1, the Services PMI rose to the high since April 2022.
The PMI release included a notable quote from S&P Global Market Intelligence Chief Economist Chris Williamson (compliments of Bloomberg’s Vince Golle): “The upturn is broad-based, as rising demand continues to filter through the economy. Although led by the service sector, reflecting strong domestic spending, the expansion is being supported by an ongoing recovery in manufacturing.”
Still, there are ample signs of economic weakness. To be sure, the U.S. Bubble Economy is extraordinarily unbalanced. Yet the overall economy maintains sufficient momentum to sustain inflationary pressures and keep the Fed on the sideline. The Atlanta Fed GDPNow indicator remains above 3.0%. The U.S. economy is incredibly vulnerable, though perpetuating “Terminal Phase” excess only exacerbates fragilities. So far, trouble at the “periphery” (i.e., France) has supported loose conditions at the “core”. Probabilities for a destabilizing global “risk off” deleveraging continue to rise....
Weekly Commentary: Greatest Threat