FANG and tech stocks lead the market lower
T-notes have turned higher, for the short-term at least
Strong Q4 GDP is old news due to fading Q1 GDP expectations
Treasury today concludes its record weekly sales
FANG and tech stocks lead the market lower — Tech stocks on Tuesday took it on the chin on worries about the Trump administration’s plans to block Chinese investment in sensitive U.S. tech industries. Bloomberg reported that the Trump administration is thinking about going beyond its usual case-by-case review of proposed acquisitions based on national security to use emergency powers. The report said that the Trump administration is looking at using the International Emergency Economic Powers Act, enacted in 1997, to declare a national emergency in specific industries, allowing the administration to block transactions and even seize assets. Commerce Secretary Wilbur Ross on Tuesday also said in a TV interview that “There will be limitations on foreign investment.”
The Nymex FANG+ index on Tuesday plunged by -5.6% to a 1-1/2 month low, illustrating the weakness in high-profile tech stocks. Aside from trade concerns, the sector was hurt by company-specific news. Facebook fell by -4.9% on continued concerns about data privacy as CEO Zuckerburg will reportedly appear before a Congressional Committee. Nvidia plunged by -7.8% after saying it is halting its autonomous driving testing. Tesla plunged by -8.2% on concern about slow Model 3 deliveries and news of a NTSB investigation into a Tesla crash last Friday in California. Twitter plunged by -12.0% after short-seller Citron released a report claiming that Twitter has the greatest exposure in the media sector to a government crackdown on data privacy. Amazon (-3.8%), Netflix -6.1%), and Alphabet (-4.6%) all showed sharp declines as well.
T-notes have turned higher, for the short-term at least — June 10-year T-note prices on Tuesday rallied to a 1-1/2 month high. T-note prices are looking more bullish on a short-term basis due to the recent concern about a trade war, as well as the weaker-than-expected Q1 economic data. This week’s rally in T-note prices was particularly impressive since the Treasury this week sold a record amount of bills and notes. The 10-year T-note yield on Tuesday fell to a 1-1/2 month low of 2.78%, down by -17 bp from the mid-Feb 4-1/4 year high of 2.95%.
The longer-term trend for the T-note market still appears to be bearish, however, due to (1) the likelihood for relentless Fed rate hikes over the next two years, and (2) the likelihood that the U.S. economy will regain its momentum after the weak first quarter due to continued strong consumer and business confidence and on strong overseas economic growth.
Strong Q4 GDP is old news due to fading Q1 GDP expectations — The consensus is for today’s Q4 GDP to be revised mildly higher to +2.7% from the last estimate of +2.5%. Today’s Q4 personal consumption is expected to be left unrevised from the last estimate of a very strong +3.8%.
The markets were originally expecting U.S. GDP to remain strong at +2.8% in Q1 and show similar strength in the last three quarters of 2018. However, the recent U.S. economic data has been disappointing and expectations for Q1 GDP are falling fast. The Atlanta Fed’s GDPNow, for example, was originally looking for a strong Q1 GDP report of +2.5/3.5%, but its forecast just in the past two weeks has fallen sharply and is now at only +1.8%.
The disappointing U.S. economic data is clearly seen in the sharp drop in the Bloomberg U.S. Economic Surprise index, which measures the strength of U.S. economic data relative to market expectations. The U.S. Surprise Index in late 2017 soared to a record high on the strong pace of the U.S. economy with +3.2% growth in Q3 and +2.5% growth in Q4. However, the U.S. Surprise Index peaked at 0.99 in mid-December-2017 and has since fallen sharply to 0.47.
However, the markets are not overly worried about the recent weak Q1 economic data because it may simply be due to another episode of seasonally weak Q1 data. In the past six years, GDP growth has averaged only +1.6% in Q1, which is -0.8 points below the average of +2.4% for the other three quarters of the year. The markets continue to expect strong GDP growth through the rest of 2018 due to buoyant consumer confidence and spending, improved business investment, and stronger exports due to the synchronous global economic expansion.
Treasury today concludes its record weekly sales — The Treasury today will conclude this week’s $109 billion T-note package by selling $15 billion of 2-year floating-rate notes and $29 billion of 7-year T-notes. Today’s 7-year T-note was trading at 2.71% in when-issued trading late yesterday afternoon. The 7-year T-note yield reached a 7-year high of 2.87% in mid-Feb but has since fallen back due to trade-war concerns and stock market weakness. In fact, the 7-year T-note yield on Tuesday fell to a 1-1/2 month low of 2.69%.
The 12-auction averages for the 7-year are as follows: 2.53 bid cover ratio, $ 12 million in non-competitive bids, 4.5 bp tail to the median yield, 19.4 bp tail to the low yield, and 48% taken at the high yield. The 7-year is popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 67.4% of the last twelve 7-year T-note auctions, which is well above the 12-auction average of 63.3% for all recent Treasury coupon auctions.
Weekly EIA report — The market consensus for today’s weekly EIA report is for a +900,000 bbl rise in U.S. crude oil inventories, a -2.0 million bbl decline in gasoline inventories, a -2.0 billion bbl decline in distillate inventories, and a -0.2 point decline in the U.S. refinery utilization rate to 91.5%. Crude oil inventories last week were -0.1% below the 5-year seasonal average, the tightest level in 3-1/2 years. Gasoline inventories are +3.3% above average, while distillates are -3.0% below average. U.S. oil production last week rose by +0.3% w/w to a new record high of 10.407 million bpd.