Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Fatter Yields – Very Little Interest
It was truly dullsville in terms of the action in stocks this week. All the indices finished with minor changes. The most exciting moment occurred Tuesday when a better-than-expected US retail sales figure was released. After seeing 0.3% for April and an upward revision of 0.2% for March, traders went into a rate hike tantrum of sorts. The dollar rallied and everything else (i.e, stocks, bonds, and the metals) tanked. From that point on, most areas of the market meandered around and then finished the week near levels seen at the close on Tuesday. Oil was the possible exception, having been on an upward trajectory due to events in Iran. The latest such events included an announcement by Total S.A. that it would exit the region, and developing unrest (riots) led by members of Hamas. As for the market’s reaction to the sales data, it’s seemingly justified since there was no reduction in the market-driven odds predicting four rate increases by the Fed this year.
Other economic data released this week echoed the results shown in retail sales. US industrial production and the US manufacturing SIC Industry group surveys rose 0.7% and 0.5% respectively in the same month. The only point of contention I have with the figures is the fact that none makes any adjustment for inflation. In this case, most of the price movement responsible for the “growth” in these numbers came from the higher cost of oil/energy because of the developments in Iran. Looking elsewhere, we see some data that was a little more to the point: April Housing Starts fell 3.7%, permits fell 1.8%, and mortgage applications were down 2.7% through roughly the first week of May.
The 2-year Treasury yield stood unchanged at 2.54% for the week. An article on CNBC’s website pointed out that its yield spread to a comparable German 2-year Bund is now at its widest in almost 30 years. Obviously, many think that, since this is so, US Treasury notes/debt must be cheap on a relative basis and therefore a screaming deal – notwithstanding rates of exchange between currencies. However, there has been very little evidence of an increase in foreign buying patterns of late according to the Treasury Department. This is just another data point confirming the aforementioned predictions about Fed hikes, and hence the direction of market rates over the near term.
Best Regards,
David Burgess
VP Investment Management
MWM LLC
