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A Bird's Eye View Blog

Fireside Charts: More Central Banks Announce Aggressive Rate Cuts, Sparking Dramatic Shifts in the Currency and Bond Markets

By:BCM Investment Team | Date:Aug07, 2019 | Category: Equity, Economics, Market Highlights, Fireside Charts

The dovish trend is picking up steam as central banks in New Zealand, Thailand, and India all announce larger-than-expected cuts to their benchmark interest rates. New Zealand delivered double the expected reduction at 50 basis points, sending the NZ dollar plummeting. The Australian dollar hasn't fared much better, hitting a decade low, while the U,S,/China currency tensions heat up. There is some good news for the U.S. worker however, as job openings remain near record highs and wage growth continues. These trends, along with the U.S.'s own interest rate cut, seem to be driving mortgage applications to rise. However, the bulk of this activity came from refinance applications—which rose 12% for the week and 116% year-over-year—as applications to purchase fell for the fourth week in a row, Despite a promising jobs report and better-than-expected GDP in the U.S., should we interpret all this global dovishness as a sign that we're hurdling toward recession?

 

 

1. China's devaluation—seemingly the latest weapon in the trade war—captured the headlines, with the U.S. labeling China a "currency manipulator." China (let its) currency fell to an 11 year low over the psychological $7 level but how much lower (more devalued) can they go? As the Yuan devalues, it makes China more competitive in global trade but also reduces its USD reserves and makes it more difficult to pay down foreign denominated (namely USD) debt.

 

Source: WSJ Daily Shot, as of 8/5/19 & 8/7/19

 

 

2. The Australian Dollar also hit a decade low at .67/USD. Remember the Aussie $ carry trade?

 

Source: ABC News, as of 8/6/19

 

 

3. And New Zealand's "super-sized" rate cut sent the Kiwi dollar tumbling. Did RBNZ do this out of trade-war concerns?

 

 Source: Bloomberg, as of 8/7/19

 

 

4. The strong U.S. labor market is giving workers more power than we have seen in some time.

 

Source: WSJ Daily Shot, as of 8/7/19

 

 

5. This is continuing to materialize in wage growth that significantly outstrips measured inflation.

 

Source: FRED & Beaumont Capital Management (BCM), as of 8/7/19

 

 

6. This has helped consumers, and combined with plummeting interest rates is fueling a resurgence in demand in large purchases, 

 

Source: WSJ Daily Shot, as of 8/7/19

 

 

7. ...Most evident in mortgage applications. Will this reignite growth or signal the last excesses of a late stage economy?

 

Source: Federal Reserve, as of 8/7/19

 

 

8. The U.S. 10yr - 2yr spread is approaching inversion.

 

Source: WSJ Daily Shot, as of 8/7/19

 

 

9. And plummeting rates are driving out-sized returns in long bonds.

 

Source: Koyfin, as of 8/7/19

 

 

10. Meanwhile, Germany's entire yield curve is negative.

 

 Source: WSJ Daily Shot, as of 8/7/19

 

 

11. The German government has run a surplus the past five years.

 

 Source: FRED, as of 8/7/19

 

 

 

After Monday's market slide, many are scrambling to buy the dip. However, with the trailing one-year total return (as of 8/5/19) of the S&P 500 barely outperforming BIL (SPDR 1-3 Month T-Bill) and significantly underperforming bonds, evidence continues to mount that we're well into the late stage of the current economic cycle. Read our piece "Buying the Dips: When Does this Approach Run the Most Risk?" to learn how that changes the game and reduces the odds of a favorable outcome.

 

 

Should You Buy the Dip? 

 

 

 

Disclosure: The charts and info-graphics contained in this blog are typically based on data obtained from 3rd parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are a recommendation to take any action. Individual securities mentioned may be held in client accounts.