May’s unemployment data is released at 8:30. The narrative is rising the economy is slowing at a pace that would permit the Federal Reserve to lower interest rates later this year. Perhaps the trajectory of interest rates is more important today than ever before given the gargantuan national debt of over $35 trillion and growing.
At this point most believe that the trajectory of US fiscal policy is unstainable, though the theme seems to wax and wane along with the fortunes of the Treasury market.
It is not a major campaign variable albeit 34% of people aged 18-35 rank fiscal issues in the top three concerns according to recent polls.
Looking ahead to November’s election, many voters and market participants will assume very different economic agendas will be adopted depending upon who wins.
In reality however, it does not look like the budget can afford anything but austerity no matter who wins.
According to the Treasury Department, April marked an important milestone that most people have not realized or acknowledged. The monthly net interest outlays by the Treasury hit a new nominally monthly record of $84.74 billion. Annualized it is over $1 trillion. Unfortunately, this record is broken regularly.
A major issue at hand is the interest rate on outstanding Treasury debt remains way below the level of current market interest rates.
Treasury debt always matures and bonds maturing in less than 12 months will be replaced at a considerably higher yield. For example, Treasury debt maturing June 2025 have a weighted average coupon of 2.47%. This debt is going to be replaced by debt with over a “four or perhaps a five handle.”
The Treasury Department states bonds in its portfolio maturing through April 2029 have a weighted average coupon of 2.56%; those maturing after that date have a average yield of 2.90%.
Many believe Washington is walking into a buzz saw and a crisis must occur before any meaningful action occurs.
Today is unprecedented in many ways. Prolific and unstainable fiscal spending is occurring in a rising rate environment in market where equity concentration is at historic proportions. The Bloomberg Intelligence Market Pulse Index, a sentiment gauge that acts as a contrarian signal, is within striking distance of manic territory, an extremely rare event.
Bank America wrote yesterday “a measure of single stock fragility reached a 30-year high, posing a potential significant risk among the biggest companies within the S & P 500.”
Some reasons for the increased fragility include a very crowded trade “with a massive concentration of wealth in handful of names, low liquidity and fear of missing out, with investors rushing to exit these positions when momentum turns.”
Viewing today’s environment perhaps differently, for the first time in over 20 years cash is an attractive alternative investment.
Yes, the equity market is very concentrated as five names comprise over 28% of the S & P 500 with an average multiple of 39x. Ten names comprise a record 35.7% of the S & P 500 capitalization, far exceeding the previous record by a factor of two.
However, outside these five names, the remainder of the index is trading at a median PE of 18x trailing and 16x anticipated earnings, names that are vastly under owned.
Some have suggested because of this massive discrepancy Wall Street research will regain its former preeminence if monies begin exiting these greatly owned names [names that are over owned perhaps the result of indexing which has become the only investing strategy where price discovery is not a factor]
May’s BLS report is released at 8:30 and can potentially again alter perceptions. Analysts are expecting a 185k and 165k increase in nonfarm and private sector payrolls, respectively, a 3.9% unemployment rate, a 0.3% increase in average hourly earnings, a 34.3 average hourly work week and a 62.7% labor participation rate.
Last night the foreign markets were down. London was down 0.58%, Paris down 0.65% and Frankfurt down 0.67%. China was up 0.08%, Japan down 0.05% and Hang Seng down 0.59%.
Futures are flat but this could change significantly based upon the 830 data. The 10-year is off 2/32 to yield 4.30%.
