Stock futures gain as bond yields rise

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Fox Business 09 July, 2021 - 02:24am 18 views

What are Treasury yields?

Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations. ... But high long-term yields can also be a signal of rising inflation in the future. InvestopediaTreasury Yield Definition

The 10-year U.S. Treasury yield fell as low as 1.25% on Thursday, its lowest point since February, continuing a sharp reversal in the bond market amid growing concern about the pace of the global economic recovery.

The yield on the benchmark 10-year Treasury note was 2.8 basis points lower at 1.293% by 4:00 p.m. ET, climbing back slightly after reaching 1.25% earlier in the session. The yield on the 30-year Treasury bond dipped 2.5 basis points to 1.919%. Yields move inversely to prices and 1 basis point equals 0.01 percentage points.

"This decline in bond yields could be signaling that the inflation burst is transitory, and/or that the Delta variant will slow growth, although at 1.25% this morning that seems extreme," Ed Hyman, founder and chairman of Evercore ISI and head of economic research, said in a note Thursday.

Thursday's weekly jobless claims report indicated a slowdown in job growth. First-time applicants for unemployment benefits unexpectedly jumped to 373,000 in the week ending July 3. Economists were looking to see 350,000 initial claims, according to Dow Jones.

The increase in initial filings for unemployment insurance comes after June's jobs report on Friday showed the unemployment rate rose to 5.9%, higher than expected.

The spread of the more transmissible variant of Covid-19 also fueled worries about a deceleration in global economic growth, sending investors into the safety of U.S. Treasuries.

Japan declared a state of emergency for Tokyo that could reportedly lead to spectators being banned from the upcoming Olympic Games.

The yield decline in recent weeks represents a sharp reversal from a dramatic rise that started in late 2020. After entering January below 1%, the benchmark 10-year yield rose above 1.7% in March before retrenching near the 1.6% level for much of April.

The move has mystified investors and some believe it's largely technical factors driving the decline in yields.

"Over the past few months, many portfolio managers were expecting the 10-year Treasury yield to rise and held short positions in bonds. With the Federal Reserve reiterating its patient stance on tapering in Wednesday's minutes report, many portfolio managers changed course and covered their short positions in bonds, which drove up bond prices and pushed yields down," George Ball, chairman of Sanders Morris Harris, said in a note Thursday.

The Fed on Wednesday released the minutes from its latest meeting on June 15-16.

Some members indicated that the economic recovery was proceeding faster than expected and was being accompanied by an outsized rise in inflation, both making the case for taking the Fed's foot off the policy pedal.

However, the prevailing mindset was that there should be no rush and markets must be well prepared for any shifts. 

Short term rates have not fallen at the same pace as long-term rates, causing a so-called flattening of the Treasury yield curve. Investors expect the central bank's first move would be to slow its asset purchases while leaving its main rate at historic lows.

CNBC's Pippa Stevens and Jeff Cox contributed to this market report.

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Price of Gold Fundamental Daily Forecast - Bullish Factors Lining Up, but Investors Remain Cautious

FX Empire 09 July, 2021 - 07:31am

At 15:04 GMT, August Comex gold is trading $1800.10, down $2.00 or -0.11%.

The price action suggests that short-covering is still driving prices higher rather than new buying. It also suggests that buyers may be more interested in buying weakness or a pullback into support rather than strength or a breakout to the upside.

Gold does appear to be fairly priced, however, when compared to Treasury yields. The 10-year Treasury yield is at its lowest level since February 24. On this date, August Comex gold was trading $1787.90 to $1814.80. It closed at $1802.80. Gold is currently straddling the $1800.00 level.

Gold’s relationship with Treasury yields can’t be denied so in order to trigger an even stronger rally, Treasury yields are going to have to continue to drop. This could happen over the short-run if global equity markets plunge and traders seek shelter in the U.S. Treasurys.

The 10-year U.S. Treasury yield fell as low as 1.25% on Thursday, its lowest point since February, continuing a sharp reversal in the bond market amid growing concern about the pace of the global economic recovery.

Thursday’s weekly jobless claims report indicated a slowdown in job growth. First-time applicants for unemployment benefits unexpectedly jumped to 373,000 in the week-ending July 3. Economists were looking to see 350,000 initial claims, according to Dow Jones.

The increase in initial filings for unemployment insurance comes after June’s jobs report on Friday showed the unemployment rate rose to 5.9%, higher than expected.

The spread of the more transmissible variant of COVID-19 also fueled worries about a deceleration in global economic growth, sending investors into the safety of U.S. Treasurys.

Japan declared a state of emergency for Tokyo that could reportedly lead to spectators being banned from the upcoming Olympic Games.

Potentially bullish factors are lining up, but investors are being cautious. Instead of chasing prices higher, they appear to be waiting for a dip back into a value zone. Shorts continue to cover with buyers still on the sidelines. This is understandable since it was only a couple of weeks ago that gold traders were betting on higher interest rates and the start of tapering by the Fed.

The economic data suggests the recovery is moving slowly, which means the Fed may be in no hurry to tighten policy. The Fed minutes were dovish with half of the FOMC policymakers feeling the same way about the economy.

We could see a near-term spike to the upside in gold if a plunge in stock prices drives yields sharply lower.

‘A Narrative of Fear’: Plunging Stocks Finally Heed Bond Signal

Yahoo Finance 09 July, 2021 - 07:31am

The S&P 500 Index fell as much as 1.6% on Thursday, the most since May, as all major industries slipped. Commodity and financial shares led the retreat, the latest sign that the once-hot reflation trade is sputtering, with the delta variant of coronavirus quickly spreading and talk about monetary stimulus heating up in China.

Just last week, the S&P 500 rose to record for its seventh straight session, a feat not seen since 1997. For eight months, the benchmark has gone without a peak-to-trough decline of 5%, the longest stretch since 2018.

“When the market is as expensive as it is today, it doesn’t necessarily need a specific catalyst to change investor psychology,” said Matt Maley, chief market strategist for Miller Tabak + Co. “The Treasury market sniffed out these concerns earlier this week and now the stock market.”

A wave of selling landed right at the open. The so-called Tick index, which compares stocks’ moves second-by-second, showed New York Stock Exchange companies trading on downticks exceeded those on upticks by 2,006 at one point. That’s the second-highest in the past year and a reading that before 2020 was seen only once since Bloomberg began tracking the data in 1989.

Here is a compilation of investor and trader views on what’s behind Thursday’s pullback in the equity market.

Adrian Miller, chief market strategist at Concise Capital Management LP:

“In our view, the bond market is the big brother of the equity market. And when the big brother does something the little brother follows, no questions asked.”

“If we are to believe economic momentum can only cool from the current pace, investors need to determine how much should you pay for an economy returning to a normal glide path. And, instead of paying 22x 2021 SPX earnings or 20x 2022 earnings, perhaps the right value is 18x.”

Dan Suzuki, Richard Bernstein Advisors LLC’s deputy chief investment officer:

“There’s a growing narrative of fear out there as well. I think some investors are wondering whether the bond market is signaling slower growth, which is feeding the idea that the peak in growth/inflation numbers is going to signal the shift from positive surprises to negative surprises.”

Josh Wein, portfolio manager at Hennessy Funds:

“The S&P is up 16% this year so certainly a giveback on the equities side is to be expected but on the bond side the narrative of inflation driven by labor shortages or product shortages or both -- subdued economic growth globally may be ratcheting down expectations and that is deflationary. I look at the ten-year and I think growth here will maybe be a little bit less than what we thought and also that the idea that we’re going to hit an inflation wall with the ten-year being at 1.3%, something doesn’t jive there. I’m going to believe the bond market before I believe people saying there is going to be inflation.”

Chris Grisanti, chief equity strategist at MAI Capital Management:

“I’m still of the opinion this is a head fake and that we will see higher rates ahead, with the strong GDP growth and corporate earnings growth -- we’ve stimulated this economy so well and the path for Covid, even though we have these blips, is toward normalcy. I would take advantage of the things going on in the marketplace right now. Like the travel-related stocks, I think they will come back. This is maybe one of the last opportunities to get on that bandwagon if you missed it.”

Chris Harvey, head of equity strategy at Wells Fargo & Co.:

A sharp drop in yield “below 1.25% could cause equity portfolio managers to believe that something is wrong or broken. As a result, we see a growing possibility of a 5% sell-off in equities before earnings season.”

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Treasury Yield Slump Stokes Recovery, Inflation Debate; 10-Year Hits 1.25%

TheStreet 09 July, 2021 - 07:29am

Bets on a post-pandemic surge in consumer demand, fueled by trillions in government stimulus, record-low borrowing costs and early successes in vaccine rollouts, has given way to growth concerns linked to a surge in Delta-variant infections, labor and raw materials shortages and a pullback in retail spending.

ISM data published Tuesday indicated a notable slowdown in services sector activity -- a key driver of U.S. economic growth -- while the Atlanta Fed's GDPNow forecasting tool is indicating a third quarter advance of around 7.8%, down from 8.6% at the start of the month.

This week's 7% 'top-to-bottom' slide in oil prices, predicated on both the surge in Delta-variant cases in Asia and the chaos linked to the collapse of OPEC discussions on output curbs, also accelerated the Treasury market rally.

That weakness was expressed in minutes of the Federal Reserve's last policy meeting, which ended in June 16, which showed officials remained concerned about 'downside risks' to the recovery and insisted that benchmarks of "substantial further progress" on jobs and inflation haven't been reached. The assessment likely means the Fed is unlikely to alter the pace of its $120 billion in monthly bond purchases until much later in the year.

"In discussing the uncertainty and risks associated with the economic outlook, participants commented that the process of reopening the economy was unprecedented and likely to be uneven across sectors," the minutes read. "Some participants judged that supply chain disruptions and labor shortages complicated the task of assessing progress toward the Committee's goals and that the speed at which these factors would dissipate was uncertain."

Hints from lawmakers in China yesterday to near-term interest rate cuts added to the concern, as it suggested the world's second largest economy may suffer from both domestic demand pressures and the slowdown in trade that's likely to follow the current wave of Delta-variant coronavirus infections seen around the world. 

Curiously, even as concern for a slowdown in Asia -- and elsewhere -- gains traction, inflationary pressures remain, with China reporting the biggest surge in factory gate prices since 2008 last month and the most recent JOLTs job openings data showing a record high 9.2 million vacant positions in the U.S. labor market, suggesting employers will need to boost wages even beyond last month's 3.6% increase to entice people back onto the shop floor.

The Fed's preferred measure of U.S. inflation, the core PCE Price Index, surged the most in nearly three decades for a second consecutive month in May a reading matches the signals from the Commerce Department's May retail sales tally, which showed a 1.3% decline to $620.2 billion as the impact of stimulus from the American Rescue Act continued to fade and CPI rose at the fastest pace in more than ten years.

Still, ING rate strategist Padhraic Garvey thinks 10-year note yields are "more attracted to 1% than 2%" even at these reduced levels, although "material taper talk could spark a change".

"The US is key here, and simplistically there are two outcomes ahead. One is a 1-handle outcome. This is where the 10-year grinds down towards 1% (extrapolate the path we are currently on)," Garvey said in a client note Thursday. "The other is a 2-handle outcome, where the US 10 year reverts higher and ends up at 2-point-something." 

"That’s our macro-inspired central view, but it’s proving to be a heavy lift," he added. "Proper taper talk should be determinative, and if that does not push us there, then it’s hard to know what will."

Stocks close higher, led by gains for tech

USA TODAY 09 July, 2021 - 07:29am

Wall Street capped a day of choppy trading Wednesday with more record highs for stocks and another drop in bond yields that sends mixed signals about investors’ confidence in the market.

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Wall Street capped a day of choppy trading Wednesday with more record highs for stocks and another drop in bond yields that sends mixed signals about investors’ confidence in the market.

The S&P 500 recovered from an early stumble and rose 0.3% to an all-time high. The benchmark index snapped a 7-day winning streak of high closes a day earlier. The Nasdaq composite also set a record high, its third straight.

Technology, industrial and health care companies accounted for a big share of the gains. Apple rose 1.8%, Otis added 2% and Biogen gained 3%. Those gains were kept in check by a slide in other sectors, including energy, which fell as oil prices dropped 1.6%.

The bond market continued to draw buyers, a trend that has pulled yields sharply lower this week despite economic data showing the economy continues to recover from the pandemic. The yield on the 10-year Treasury fell to 1.32% from 1.37% a day earlier.

“There’s a pretty clear disconnect between stocks and bonds,” said Jon Adams, senior investment strategist at BMO Global Asset Management.

The S&P 500 rose 14.59 points to 4,358.13. The Dow Jones Industrial Average added 104.42 points, or 0.3%, to 34,681.79, while the Nasdaq inched up 1.42 points, or less than 0.1%, to 14,665.06. The Russell 2000 index of smaller stocks slid 21.66 points, or 1%, to 2,252.85.

Stock indexes and Treasury yields had little reaction to the minutes from the June meeting of Federal Reserve policymakers, which showed Fed officials discussed the timing of reducing bond purchases that they have used to keep longer-term interest rates in check.

The discussions signal that the Fed is moving closer to a decision to taper those purchases, though most analysts don’t expect a reduction until late this year. After the last meeting, Fed policymakers said they planned to raise interest rates as soon as 2023, which was sooner than the market expected.

“The bond market is agreeing with what the Fed has talked about in terms of transitory inflation and maybe going a step further and saying we’re not real sure about how resilient this recovery is going to be once some of the stimulus starts to fade,” said Willie Delwiche, investment strategist at All Star Charts. “If there’s some uncertainty about equities, investors are taking this chance to move back into bonds a little bit.”

Longer-term Treasury yields have tumbled since the spring as traders back away from big bets built on expectations for a powerful pickup in inflation and economic growth.

The yield on the 10-year Treasury sank as low as 1.28% Wednesday, down from its perch above 1.75% in March. A month ago, it was trading at around 1.62%. The last time bond yields moved lower so quickly was in March 2020 when the pandemic effectively shut down the U.S. economy.

Longer-term yields tend to move along with investors’ expectations for inflation and economic growth, and both are still very strong and much higher than they’ve been in recent years. But investors along Wall Street increasingly suspect they’ve already topped out as the economy moves past the initial catapult phase of its recovery from the pandemic.

A report on Tuesday showed growth in the U.S. services industry slowed last month, for example, and by more than economists expected.

A wide range of other reasons are behind the sharp drop in yields in recent months, said Adams. Chief among them is growing doubt in the market that the Fed would allow inflation to stay above 2% for a while before raising rates or making other moves to stamp it out, regardless of its new policy to do just that.

Adams also pointed to worries that new variants of COVID-19 could drag down the global economy and increased buying of Treasurys by buyers from countries whose bonds were offering even less in yields.

Lower bond yields can be good for many parts of the economy, however. Mortgage rates are tied closely to bond yields, and government borrowing costs fall when the cost of issuing bonds decreases.

What’s been perhaps as striking as the swift drop for Treasury yields is the relative calmness in the stock market.

“There’s a fundamental reset going on right now where investors are looking beyond 2021 and 2022,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management. “Once we get beyond the recovery, the next normal is probably going to look like the last normal.”

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