ALWAYS EXPECT THE UNEXPECTED

Always expect the unexpected. Late last week the 10 year Treasury traded to a 2.07% yield down from a 3.23% yield registered in late November. According to the WSJ, the lowest 2019 projected yield from a late 2018 survey of the largest Wall Street firms was a 2.50% yield.

At the time of this writing, the Journal states three interest rate reductions have been priced in by year end. The catalyst for the decline in yields is a slowing economy, the result of trade uncertainty and the fading impact of tax reform.

What will the headlines read on December 11? Is the economy slowing as dramatically as the bond market is suggesting or is there other factors at work that is perhaps skewing the landscape?

There is ample evidence all financial markets are devoid of liquidity and I will argue the melt up in bond prices is a function of this illiquidity.

Next week is a Federal Reserve meeting and the recent compilation of statistics utilized at this meeting is suggesting the economy is on a firmer footing than earlier in the year. The central bank did not state it will alter monetary policy but rather made the obvious comment that any policy will be data dependent. The data is suggesting stability or nominally increasing growth.

It is against this backdrop is why I believe for the intermediate future there will not be a change in monetary policy.

In some regards the above view is consensus except in the financial markets. There is a disconnect between stated views and prices. Disconnects do not last and either prices will fall or the data deteriorates.

Speaking of unexpected change, one week ago FANG was plummeting. In 30-days the VIX went from one extreme to another, a historical first. Liquidity questions were being raised by all. FOMO was replaced by FOGO.

Five days later, equities acting euphoric with declarations of FOMO again are being raised. Treasuries are surging. All on a market that is considered illiquid.

Some could draw the conclusion the markets are manic, defined as going from one extreme to the other. I could share this view but will also add the markets are entirely dominated by technology based trading that is unable to think multidimensional.

What will happen today?

Last night the foreign markets were up. London was up 0.50%, Paris up 0.79% and Frankfurt up 1.32%. China was up 2.58%, Japan up 0.33% and Hang Sang up 0.76%.

The Dow should open moderately higher on perhaps more optimistic trade outlook between China and the US. Markets are also trading off of the news that Chinese local governments may spend more on infrastructure to offset any impact of US tariffs. The 10-year is off 6/32 to yield 2.17%.

 

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