Bond Market Inspired Equity Sell-Off

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By: Kent Engelke | Capitol Securities

Equities fell again as the yield on the 10-year Treasury is near April 2014 highs. A catalyst for the continual selloff in the 10-year is stronger than expected growth. The Euro-zone growth rate was the greatest in 17 years. I would argue this strength is the result of surging American imports.

Cynically writing, if globalism and interdependency is as great as many pundits suggest, then why is growth surging in the demise of globalism and the return back to economic nationalism?

The question at hand is will the return of economic nationalism stoke inflationary pressures? I ask a different question. Is not the return of inflationary pressures the primary goal of the world’s central bank during the past nine years?

Speaking of the central banks, today the US Federal Reserve will make a policy announcement following the conclusion of a two-day meeting. No change in interest rates is expected, but all will pay close attention to the tenor of the post meeting statement. It is a forgone conclusion the Committee will increase rates in March.

Equities are searching for a catalyst. The catalyst since November has been tax cuts and earnings and a strong case can be made the averages may “buy on rumor and sell on fact” as profit expectations materialize. Unfortunately, the next catalyst may be interest rates and potentially inflationary growth.

At the beginning of the year, the averages had not yet discounted two interest rate increases, much less the three forecasted by the FOMC. Moreover, the talk was about a flattening yield curve, not a steepening.

Speaking of Treasuries, today the Treasury will announce its quarterly refunding announcement. This statistic is quickly becoming a talking point, a statistic that as little as two weeks ago few knew existed. As noted several times, net Treasury issuance is expected to more than double in 2018, rising to over $1.3 trillion, or the greatest amount since 2009, which in itself was a record, the result of the financial crisis.

To remind all, the 20-year average yield for the 10-year treasury is around 3.75%, about 100 bps higher than today’s rate.

What will happen today? President Trump’s SOTU address offered few new clues on policy.

Last night the foreign markets were mixed. London was down 0.07%, Paris was up 0.29% and Frankfurt was up 0.17%. China was down 0.21%, Japan was down 0.83% and Hang Sang was up 0.86%.

The Dow should open modestly higher on earnings, but the gains may be short lived if the Fed announcement is more bearish than expected. The 10-year is up 4/32 to yield 2.71%.

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