Bond Yields Close to Flashing Recession Warning
Last Updated 4:15 PM EST
Stock indices finished Tuesday’s session mixed. The S&P 500 and Nasdaq 100 were up 0.16% and 1.68%, respectively. Meanwhile, the Dow Jones Industrial Average declined 0.42%.
The energy sector was the session’s laggard, as it declined by 3.93%. Conversely, the communications sector (XLC) was the session’s leader, with a gain of 2.35%. In addition, WTI crude oil remained under $100 per barrel after falling almost 10% from its previous close. At around $99 per barrel, it continues to hover around the session low of $97.46.
Furthermore, Treasury yields fell today, with the U.S. 10-Year Treasury yield at 2.833%, a decrease of 8.8 basis points. In addition, the Two-Year Treasury yield is at 2.831%, bringing the spread between them to only 0.2 basis points after briefly inverting earlier on in the day. A flat or inverted yield curve is unfavorable for banks as it tends to hurt net interest margins.
Interestingly, the market is now pricing in a higher chance of a lower Fed Funds rate for the end of the year. In fact, the market now expects a 48.2% probability that the rate will be between 3.25% to 3.5% and a 31% chance of it being between 3% to 3.25% in December 2022. For reference, the probabilities one week ago were 37.1% and 7.3%, respectively.
U.S. Vehicle Sales Increase During June but are Down Year-Over-Year
Last Updated 3:00 PM EST
Stock indices are mixed, heading into the final hour of Tuesday’s trading session. As of 3:00 p.m. EST, the S&P 500 and the Dow Jones Industrial Average were down 0.3% and 0.9%, respectively. Meanwhile, the Nasdaq 100 gained 1.2%.
On Tuesday, the Bureau of Economic Analysis released its report for U.S. All Car Sales, which measures how many passenger cars were sold in a month, including station wagons. In June, the number of car sales increased to 2.72 million compared to 2.67 million in May.
However, this figure is down substantially from the 3.58 million that were sold during June 2021, equating to a year-over-year decline of 24%. Indeed, car sales have been in an overall downtrend since the post-pandemic peak of 4.22 million in April 2021.
A similar trend can be witnessed in the U.S. All Truck Sales report, which is issued by the U.S. Department of Commerce and is composed of all passenger cars and light truck sales. Sales increased in June to 10.28 million compared to 10.04 million during the month prior.
This number was down from last year’s report of 11.8 million. In addition, the trend has also been in a downward slide since peaking in April 2021 at 14.55 million.
A combination of higher inflation and global chip shortages is likely to be the reason for these declines, as more money needs to be allocated to essentials while auto manufacturers can’t get the parts required to fulfill demand.
Oil Falls Below $100; U.S. Factory Orders Come in Higher than Expected in May
Last Updated 12:00PM EST
Stocks are negative halfway into Tuesday’s trading session. As of 12:00 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are down 1.8%, 1.5%, and 0.2%, respectively.
The energy sector (XLE) is the laggard so far, as it is down almost 4.9%. Conversely, the consumer discretionary sector (XLY) is the session’s leader with a gain of 0.2%. In addition, WTI crude oil has fallen below $100 per barrel for the first time since May, representing a decline of roughly 10% from its previous close.
On Tuesday, the U.S. Census Bureau released its monthly report for U.S. Factory Orders, which measures the month-over-month change in new orders placed with manufacturers. For the month of May, new orders increased by 1.6%, much better than the expected 0.5%.
It’s worth noting that this indicator is based on data from May, making it a lagging indicator. Indeed, the Institute for Supply Management released its Manufacturing New Orders Index last week for June, which showed a decline.
Interestingly, the ISM’s report also showed an increase in May. Therefore, the U.S. Census Bureau’s Factory Orders report next month will likely also come in negative.
Treasury Yield Spreads are Flat as Recession Fears Increase
Last Updated 10:00AM EST
Stocks are negative 30 minutes into Tuesday’s trading session. As of 10:00 a.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are down 1.4%, 1.9%, and 1.4%, respectively.
All sectors are in the red, with the materials sector (XLB) being the laggard so far, as it is down 3.8%. Conversely, the consumer staples sector (XLP) is the session’s leader, with a decline of 1.1%.
WTI crude oil tumbled despite supply outages in Libya and a Norwegian worker strike. The worker strike could reduce oil output in Norway by 8%, which equates to roughly 320,000 barrels per day.
Nevertheless, recession fears appear to be at the forefront of investors’ minds. Currently, the price of oil is hovering around $103 per barrel, which is close to its previous month’s low of $101.56 per barrel.
Meanwhile, bond yields are lower as the U.S. 10-Year Treasury yield is now hovering around 2.816%. This represents a decline of 10.5 basis points from the previous close.
Similar movements can be seen with the U.S. Two-Year yield, which is now also at 2.816%. This means that the spread between the 10-Year and Two-Year U.S. Treasury yields is now flat, as it currently sits at 0 basis points.
Pre-Market Update
Stock futures were volatile on early Tuesday morning after major indices closed in the red last week despite Friday’s modest gains. The U.S. stock market was closed on Monday for the Independence Day holiday.
Futures on the Dow Jones Industrial Average (DJIA) shed 0.45%, while those tied to the S&P 500 (SPX) declined 0.54%, as of 5:17 a.m. EST, Tuesday. Further, the Nasdaq 100 (NDX) futures inched 0.71% lower.
The Dow, S&P 500, and Nasdaq 100 were up 1.05%, 1.06%, and 0.71%, respectively, at the end of regular trading hours on Friday, after witnessing the worst first half in decades on Thursday.
Overall, the S&P 500 has plunged nearly 20% year-to-date, while the Dow-Jones and the tech-heavy Nasdaq 100 have declined 14.4% and 29%, respectively. The stock markets are in the red amid growing concerns about a potential recession.
The Fed’s multiple interest rate hikes to rein in inflation are expected to slow down growth, potentially pushing the economy into a recession and further pulling down capital markets. Moreover, persistent supply chain issues and the Ukraine-Russia war are also impacting investor sentiment.
The focus this week will be on the minutes from the Federal Reserve’s latest policy meeting and May JOLTS (Job Openings and Labor Turnover Survey) report on Wednesday, initial jobless claims data on Thursday, and Friday’s jobs report for the month of June. According to Dow Jones, economists anticipate that 250,000 non-farm payrolls were added in June, implying a slowdown from the 390,000 added in May. Economists expect the unemployment rate to be steady at 3.6%.
Overall, macro challenges and concerns about an economic slowdown are expected to keep the U.S. as well global stock markets volatile in the days ahead.
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