In June the stock market and the bond market rallied sending conflicting signals about the economy. It is unusual for these two markets to move in the same direction. In May the stock market pulled back on a lack of progress with China trade talks and bond prices rose. In June stock prices and bond prices both moved higher. The report from the June Federal Reserve meeting was the catalyst for increasing stock prices. On June 19th the Federal Reserve held short term rates steady and hinted at possible cuts before the end of 2019 if necessary to continue economic expansion. It signaled that it could lower short term interest rates by as much as one-half of a percent before the end of this year.
The yield on the 10 year U.S. Treasury has fallen below 2% for the first time since 2016. When bond prices rise, bond yields decline. On October 1, 2018, the yield on the 10 Year U.S. Treasury was 3.2%. In the last few months it has declined and is paying less than 2% today. Mortgage rates are down a full percentage point since the beginning of 2019. As a result home sales are up and new homes are in short supply. Builders cannot keep up with the demand.
Interest rates usually go down when the economy is struggling. When inflation and unemployment rise, interest rates decline in order to assist the economy. The business outlook is more subdued for the last half of 2019 but the economy is not struggling. The biggest worry for economists is trade and how the administration’s trade policies may impact our economy in the future. Expectation at this time is slower growth, but not likely a recession near term.
In June Mid-East tensions rose as Iran shot down a U.S. unmanned drone. Any tensions in the Mid-East usually cause oil prices to rise. For now it seems that the administration was able to de-escalate a potentially serious situation.
As June drew to a close the G-20 meeting in Japan was the focus. The U.S. President’s meeting with the leader of China was high on investors’ list of concerns with a hope that trade talks could resume. The market closed for the month and the quarter on Friday, June 28th without the answer to this question. By early Saturday morning, June 29th, the President told journalists that trade talks with China were successfully revived. The meeting with President Xi Jinping lasted an hour and following the meeting President Trump announced “We’re right back on track. We’ll see what happens.” He pledged to hold off on tariffs that he had previously threatened to impose if an agreement could not be reached. This news caused a surge in the stock market at the open on Monday, July 1st.
We are in an interesting situation where all the major asset classes are in a positive trend at the end of June. We are watching closely to see how this plays out for the remainder of the year.