GPD AT 8:30

Initial estimates of second quarter GDP is released at 8:30.  Analysts are expecting a 1.8% growth rate as the decline in inventories is expected to subtract about 1.3% from growth.  This is the inverse from the first quarter when inventory accumulation added to GDP.  Consumer spending is expected to increase by the most since 2014, partially the result of strong job gains and rising wages.

A 1.8% growth rate would be the slowest growth since the first quarter of 2017, but is around the average pace experienced during the Obama Administration.

Recent data including yesterday’s release of the notoriously volatile durable goods data, which jumped by the greatest amount since February 2018, and weekly jobless claims which fell to a fresh five week low are around the lowest levels in over fifty years, is suggesting the economy may not be as weak as many are suggesting.

Yesterday the head of the ECB commented that he believes the EU environment is worsening, the reason for his continued dovish stance including maintaining a negative interest rate of 0.4%  and planning another round of monetary stimulus as soon as September. As a result both the German 10 year bund yield and French 10-year fell to a record low yield of -0.41% and -0.16% respectively.

According to Bloomberg 80% of Germany’s debt now has a negative yield.  Almost the entire Danish government debt is negative yielding.  The indebted country of Greece now has a 10-year yield of 2%, around the same levels as Italian debt.  Two months the fiscal pressures in Italy and Greece were major news.

The only country that does not have negative yielding sovereign debt is the US  [Note: Is this not a paradox as the US 10-year Treasury is yielding around the same level as Greek and Italian debt?  Who ever said financial markets are rational?]

Again referencing Bloomberg negative yielding bonds now make up about a quarter of the investment grade Barclay’s Global Aggregate Index.  Wow!

What will be the result of today’s environment?  Perhaps the only concrete comment to write is that no one knows as there has yet been a chapter written about today’s environment in a bond math or economic book.  Yesterday’s academic studies declaratively stated that such would never occur.

Perhaps a cynical statement to write is maybe every central banker is wrong.  That there is something bigger involved such as the non-elected bureaucratic state that is stifling growth, a major reason why the populist economic nationalist movement as to which President Trump is only the symptom of not the cause, is sweeping the industrialized democracies.

Commenting briefly upon yesterday’s market action, equities fell on earnings.  The tech heavy NASDAQ fell about 1.0% while the Dow declined about 0.5%.  Regarding the ECB, can it be suggested that equities have already priced in any type of monetary stimulus and the reaction to any type of further intervention will be muted unless it is bazooka sized?

I think yes.

Last night the foreign markets were mixed.  London was up 0.63%,  Paris up 0.53%  and Frankfurt up 0.36%. China was up 0.24%,  Japan down 0.45% and Hang Sang down 0.69%.

The Dow should open nominally higher on mixed earnings and optimism about a dovish outcome of next week’s FOMC meeting.  The 10-year is up 4/32 to yield 2.07%.

kent
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.