Bob’s Journal for 10/8/20

Long-Term Treasury Bonds Grabbed My Attention This Week

Long-term treasury bonds could be near a turning point.

Let’s look at the exchange-traded fund (ETF) iShares 20+ Year Treasury Bond (TLT). The fund moved higher the last several years, even outperforming stocks for periods of time.

But it started to stumble with the liquidity crash in March and has been volatile since. Now, the closing price of the ETF has fallen to just below its 200-day moving average and its lowest price since June.

TLT had its worst single-day decline this week since mid-May, and the weekly drop rivaled the downturns during March’s volatility. TLT hadn’t closed below its 200-day moving average since March 1, 2019, and that was its longest period above the 200-day moving average since it began trading in 2002.

The decline of TLT means longer-term interest rates are increasing even as the Federal Reserve holds short-term rates near zero. The rise in longer-term rates probably means investors are beginning to expect inflation to rise over the next few years. That’s probably good news for gold and bad news for the dollar.

It is likely that the Fed doesn’t want longer-term rates to rise too much above short-term rates. When rates rise near the Fed’s comfort level, the Fed will step in and buy some long-term treasury bonds. But we don’t know what that level is. Until it is reached, long-term treasury bonds are likely to continue their decline.

San Francisco Real Estate Continues to Suffer

Before the pandemic, San Francisco was among the nation’s hottest real estate markets for a long time.

Both residential and commercial real estate prices soared, fueled by building restrictions and wealth rapidly created by technology companies.

The coronavirus pandemic appears to have finally dented the market.

Many companies are learning how well their employees can work remotely, especially tech workers. The companies don’t need all the office space they did in the past. Some have decided San Francisco is too expensive and are moving or considering moves to cheaper localities, such as Austin, Texas, Denver and Reston, Virginia.

San Francisco office rents declined 4% from the end of March to the end of September, according to a report published in The Wall Street Journal. No other U.S. city’s rents declined even half that much during the period.

In addition, new leasing deals are down about 81% over 12 months.

Office occupancy in San Francisco is only about 15%, partly because the city has had more restrictive closures for the pandemic than other cities.

The city might bounce back, as it has from past declines. But if it doesn’t this time, the change will also hurt a lot of restaurants and other businesses that depend on the presence of office workers.

How Much Did GDP Bounce Back?

We know from data streaming that the economy bounced back in the third quarter.

The questions are: How much did it bounce back? And will the recovery hold?

Retail sales increased significantly during the third quarter. That was the result of stimulus spending, people going back to work and a strong stock market.

Manufacturing bounced back much faster than the rest of the economy.

The service sector, which is about 70% of the economy, was more uneven. A number of professional services and other types of businesses either maintained revenue levels with remote work or came back to work quickly.

But entertainment and travel businesses continue to suffer. Restaurants and bars are either closed or open at reduced capacity in most areas.

Most analysts are forecasting that third-quarter gross domestic product (GDP) growth will be reported at annualized rates between 25% and 33% from the end of the second quarter. Some forecasts are higher.

But that’s the past. The important question is how much growth, if any, we’ll see from here.

The fiscal stimulus terminated at the end of July, and leaders in Washington have been unable to reach an agreement for any extension. This week, Federal Reserve Chairman Jerome Powell warned there would be tragic economic consequences if additional fiscal stimulus isn’t provided. The minutes of the Fed’s September meeting indicated a majority of the Federal Open Market Committee worried about the expiration of the fiscal stimulus.

In addition, resurgences in virus cases are causing some businesses to fully or partially close, and some localities are imposing new restrictions on activities.

It was clear in the early summer that there would be a big bounce from the economic bottom as portions of the economy resumed activity. It also was clear that the full economy wouldn’t resume activity, and growth after the initial bounce likely would be slow.

The latest data indicate growth is much slower than it was in July. Without additional fiscal stimulus, growth might turn negative. There’s a risk that businesses doing well now might be pulled down by the additional closures and lack of fiscal stimulus.

The Data

New unemployment claims for the latest week were worse than expected. New claims were 840,000, and last week’s new claims were revised higher to 849,000. New claims have been above 800,000 since mid-March. Continuing claims for regular unemployment benefits declined by more than one million to 10.98 million.

Total continuing claims for all types of unemployment benefits were 25.5 million. More than half of those claimants are receiving one of the special benefits created for the pandemic.

The ISM Services Index said the service sector expanded at a faster rate in September. The index rose to 57.8 from 56.9.

The PMI Composite Index final for September showed a slight decrease in growth for the month. The composite fell to 54.3 from 54.6 in August. The services sector index decreased a little while the manufacturing index improved a little.

Consumer Sentiment, as measured by the University of Michigan, increased a little to 80.4 in September from 78.9 in August. Sentiment about current conditions didn’t change much but positive expectations for the next six months increased to 75.6 from 73.3.

Consumer Credit decreased in August at a 2% annualized rate. Consumers pulled back on daily spending as reflected in the 11.25% annualized decline in credit card balances. Other non-mortgage credit, primarily auto and student loans, increased at a 0.75% annualized rate.

Factory Orders also were disappointing. They increased 0.7% in August, compared to 6.4% in July. Excluding transportation, the August increase was the same 0.7%, which compares to 2.1% in July.

Durable Goods Orders increased 0.5% in August, a little better than the 0.4% in July. Non-defense orders excluding aircraft increased 1.9%, which follows a 1.8% increase in July. That’s considered a sign of solid investments being made by businesses.

Last Friday’s Employment Situation reports generally were worse than expected.

The unemployment rate declined from 8.4% to 7.9%. But only 661,000 new jobs were created in September. That was substantially less than estimates and about half of August’s number.

The JOLTS (Job Openings and Labor Turnover Survey) for August showed little change in the number of job openings in the economy from July. There also were small changes in the other components of the report, indicating the labor market didn’t change much in August.

The Markets

The S&P 500 rose 1.75% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 1.95%. The Russell 2000 increased 6.84%. The All-Country World Index (excluding U.S. stocks) added 1.98%. Emerging market equities climbed 2.40%.

Long-term treasuries declined 2.35% for the week. Investment-grade bonds lost 0.09%. Treasury Inflation-Protected Securities (TIPS) dropped 0.30%. High-yield bonds rose 1.23%.

In the currency arena, the U.S. dollar fell 0.20%.

Energy-based commodities increased 1.02%. Broader-based commodities rose 1.85%, while gold was unchanged.

Bob’s News & Updates

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