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Investing.com - Here’s a look at three things that were under the radar this past week.
1. Fed Can’t Afford a Little Patience?
A key portion of the U.S. Treasury yield curve inverted further this week as worries about a prolonged U.S.-China trade battle rattled investors and sent money into safer bonds.
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The yield on the 10-year, at about 2.16%, is solidly below that of the 3-month, which is at about 2.35%.
A yield-curve inversion is generally considered a sign of a potential recession. And the Federal Reserve may need to get off the bench and make a move if it wants longer-term rates to rise, according to BNY Mellon.
“Since November 2018, the fall in yields has been due to a both a more dovish outlook on policy, but also - and notable - falling real rates,” BNY Mellon said in a note. “Real 10-year yields are now just 1.6%.”
Lately, Fed members have been on the same page, stressing a message that is as neutral as you can get: the FOMC is as likely to raise rates as it is to cut them and can afford to be patient.
While this looked more dovish in late 2018, recent market activity “suggests that ‘patient’ is no longer sufficient," BNY said.
In Treasuries, as “long ends tumble (both in lower inflation expectations as well as real rates), the only prospect for re-steepening requires rate cuts to drive the short end lower and (perhaps) reignite inflation and real growth expectations,” BNY added.
And the market expects the Fed to heed that call in the second half of the year.
Fed funds futures are pricing in a more-than-50% chance that rates will be lower following the September FOMC meeting, according to Investing.com’s Fed Rate Monitor Tool.
2. Defensive Stocks Shunned, Too
In the middle of global trade tensions, with escalation every day this week, investors are looking at whether they should take their cue from the aforementioned bond market or from stocks that are still pretty resilient.
For months, the wide gap between frothy stock prices and depressed Treasury yields has divided analysts.
Even with an inverted yield curve, stocks are just 5% below all-time highs. And equity bulls continue to suggest the recent downturn is more of a correction rather than a reversal.
But investors should take a look at the surprise malaise in defensive stocks, despite a weakening risk backdrop.
Usually defensive stocks, like bonds, benefit from a rotation. But the SPDR S&P Pharmaceuticals ETF (NYSE:XPH) fell more than 7% in the past month and SPDR S&P Dividend ETF (NYSE:SDY) lost about 5.5%. Both lost more than the S&P 500.