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A STEEPENING YIELD CURVE

The yield curve steepened as shorter rates fell as Fed Governor Christopher Waller reiterated his case for a July rate cut, while the data showed an improvement in consumer expectations for inflation.

Treasuries trade on current and future inflationary expectations and according to the University Michigan Confidence Survey, consumers expect inflation to increase at an annual rate of 4.4% over the next year, down from 5% in the prior month.

The market is assigning nearly zero odds of a cut at the July 30 meeting and price in about 45 bps of easing by year-end, down from more than 65 bps at the start of the month.  The vast majority of the change in sentiment occurred following the BLS employment report that was released on July 3.

Commenting about the workforce, the federal workforce has shrunk about 22,000 in the year through May according to government statistics.   Of a total workforce of 2.9 million this number is insignificant.  It is expected to rise substantially to almost 500,000 in the coming months when the federal contractors are also furloughed.

Will this occur? 

The country has over $37 trillion in debt.  There was considerable controversy about the $9 billion dollar “claw back,” an amount that some say is completely insignificant given the amount of monies that the country owes. [$37 trillion]

Many believe—including FRB Chair’s Greenspan. Bernanke and Powell, JP Morgan’s Jamie Dimon, Warren Buffet, bond gurus Jeffrey Gundlach and PIMCO’s Bill Gross– that a fiscal crisis is all but inevitable.  The question is as to when…six weeks, six months, six years?

The country is spending way too much money.  It is not a revenue issue but rather a spending issue.

A case can be made the Treasury market is now beginning to focus on fiscal issues instead of monetary policy, perhaps a major explanation for the steepening of the yield curve.

There is a Fed meeting on July 30 and comments about monetary policy will be lacking until that date given the “blackout rules” thus suggesting the markets will be dictated by economic releases and earnings.

Speaking of which, earnings season accelerates this week.  The few results released to date have exceeded dumbed down estimates, but the question remains as to whether the upcoming results were already discounted in equity prices.

The economic calendar is comprised several tier II and III statistics, including various housing data points, the Index of Leading Economic Indicators and various manufacturing surveys.  How will they be interpreted?

Last night the foreign markets were down.  London was down 0.06%, Paris down 0.38%  and Frankfurt down 0.12%.  China was up 0.72%, Japan down 0.21%  and Hang Seng up 0.68%.

Futures are up about 0.25%.  Bloomberg writes the S & P 500 has gone 17 sessions without a move of 1% in either direction, the longest stretch of tranquility since December. The Newswire further states the momentum is waning, the advance is narrowing further, and the environment is conducive for a pullback.  This week both TSLA and GOOG post results.  Will this be a catalyst in either direction?

The 10-year is up 12/32 to yield 4.37%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. 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. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.