Monthly Archives: March 2019

Covenant Weekly Market Synopsis for March 15, 2019

March 18, 2019

Last Week Today. Fed Chair Jerome Powell’s interview on 60 Minutes revealed little new information and was likely intended to clarify the Fed’s current views. Powell did take the opportunity to emphasize confidence in the US economy (while acknowledging it will grow at a much slower rate in 2019) and stress the independence of the Fed “We will never, ever take political considerations into effect.” Powell will have another opportunity to elaborate on the Fed’s monetary policy this Wednesday, following the FOMC meeting. | On the trade front, it looks like a deal with China won’t happen before April. In the meantime, President Trump countered insiders’ claims about Trump’s supposed desperation to complete a deal stating “[he’s’] not in a rush to do China trade deal.” On the other hand, Chinese media cited “substantive progress” in trade talks. | Following weak economic data last week, the Atlanta Fed’s Q1 GDP forecast fell to 0.4%, and the NY Fed’s forecast dropped to 1.37%. | For those of you that may have been out on Spring Break or otherwise missed it, last week we published our semi-annual Economic Review and Outlook.

After taking a shot in the chin the prior week (suffering its worst weekly performance in 2019), the S&P 500 shook off the blow and rallied 2.9% to end the week at its highest level since October 9th. Growth names led the rally, specifically in technology, and the Nasdaq Index surged 3.8%. Global equities chased US stocks higher, though generally underperformed their domestic counterparts. Fixed income investments joined the party as well, as yields across the US Treasury curve declined, and high yields spreads tightened further. The commodity complex presented a mixed bag as gold (+0.3%), copper (+0.3%), and crude (+4.4%) posted gains, while silver (-0.3%) and natural gas (-2.4%) declined modestly.

For detailed weekly, month-to-date and year-to-date asset class performance, please click here.

Black Gold. The International Energy Agency (IEA) issued its latest report on Friday forecasting the “second wave of the U.S. shale revolution” will result in the United States accounting for 70% of the rise in global oil production and nearly 75% of the expansion in liquefied natural gas (LNG) trade in the next five years. The report also predicts that U.S. exports of crude oil and petroleum products will nearly double to approx. Nine million barrels per day by 2024. If the forecast comes to fruition, the U.S. will not only export more oil than Russia but could potentially surpass the current global export leader Saudi Arabia. On the demand side, the IEA’s current forecast acknowledges that electric cars and increased fuel efficiency will modestly reduce demand for gasoline. However, rising consumption for petrochemicals (e.g., plastics) and jet fuel demand will offset automobile-based demand erosion. All in, the IEA is forecasting global demand will increase by an average of 1.2 million barrels per day over the next five years, which is in line with the recent trend).

clip_image002

False Idol. Members of Congress and mainstream press are increasingly mentioning Modern Monetary Theory (MMT), but what is it and why is it drawing so much attention? MMT is a macroeconomic theory that was developed in the early 1990s, but with roots in older macroeconomic theories (i.e., Chartalism and Functional finance) dating to the early 1900s. Like most economic theories, it would take an entire white paper or book to explain the theory in sufficient detail, however, according to the Warren Mosler, the man credited with creating MMT-creator Warren Mosler:

The main takeaways are simply that with the $US and our current monetary arrangements, federal taxes function to regulate demand, and federal borrowing functions to support interest rates, with neither functioning to raise revenue per se. In other words, operationally, federal spending is not revenue constrained.

The implication is that any government that issues currency can always pay its bills (by issuing more currency) thus budget deficits are of less concern. While this is factually accurate, it is also only one aspect of MMT. Politicians touting MMT as a panacea are ignoring the entirety of the theory and the genuine long-term economic and social implications of excessively high debt levels.

Instead, some politicians are interpreting MMT as “free money” to advocate for constituent pleasing, but costly spending policies like a universal jobs guarantee and single-payer health care. While promises of “free stuff” will always garner votes, the reality is that the US is already facing an enormous debt load that will have to be addressed. Removing spending constraints from the government would only compound the debt problem, making any resolution (or reckoning) more painful.

If you’d like a sobering dose of reality, spend some time on www.usdebtclock.org. To those that argue, the U.S. debt level has been increasing and nothing terrible has happened in the economy, (paraphrasing DoubleLine’s Jeff Gundlach) that argument is about as sound as someone who has jumped off a 100-story building remarking as he fell past the 50th floor “so far so good.”

Be well,

Jp.

Covenant Weekly Market Synopsis for March 1, 2019

March 4, 2019

Risk On.  Following one of the worst December’s in the last 30 years, in 2019 equity markets began with one of the strongest January rallies in decades. Though momentum waned in February for developed market equities, risk assets continued higher, and the S&P 500 is now off to the best two-month start to a year since 1991 (in case you’re curious, the S&P 500 finished 1991 with a 30% gain, though that is not a prediction for 2019).

International equities are lagging their domestic counterparts, but double-digit returns only two months into the year are impressive nonetheless. Emerging market equities, in particular, were boosted in February by positive news on a U.S./China trade deal and evidence that the Chinese government untapped the credit spigot to stimulate slowing growth in the world’s second-largest economy.

Incidentally, commodities have also been well bid in 2019. Crude oil has been a significant beneficiary of not only the promise of the U.S./China trade deal, but also from OPEC’s commitment to reduce production. The price of WTI Crude is up 26% to just over $57 per barrel.

clip_image001

Sources: Bloomberg Finance L.P. and Covenant Investment Research

Interest rates remain low by historical standards, but high compared to the rest of the major developed economies – e.g., the yields on the 10-year German Bund and Japanese JGB’s are 0.17% and -0.01%, respectively. Importantly, of late there has been a modest steepening in the US Treasury curve. In addition to the entire yield curve shifting 0.03% to 0.08% higher, the 5-year bond yield is now approximately equivalent to that of the 2-year bond, nearly eliminating the inversion that received much attention in Q4 2018. Treasury curve inversions are a traditional signal of slowing growth and/or recession, and the slight steepening is consistent with our view that a recession is not imminent.

The Q4 GDP estimate was released last week and the 2.6% annualized (inflation-adjusted) growth rate was better than anticipated, as consumption and business investment levels exceeded expectations. Following the growth scare and Fed’s hawkish messaging in late 2018, the Q4 report showed that the economic expansion is not over. However, growth peaked in Q2/Q3 of last year and the Fed’s decision in January of this year to pause rate hikes was the correct one for now. We address both topics in Covenant’s Q1 edition of the Economic Review & Outlook scheduled for distribution within the next two weeks.

In the meantime, be well.

Justin