US Stock Market Overview – Stocks Drop on Trump Tweets; Yield Curve Inverts

Dovish Fed cannot save the markets
David Becker
Powell

US stocks were hammered on Friday, with the S&P 500 index dropping 2.6%, which drove the large-cap index down 1.4% for the week. All sectors were lower in the S&P 500 index, with energy and cyclical leading the way lower. Comments from President Trump following news that the Chinese will levy tariffs on 75-billion in US goods was the catalyst that pushed stock prices lower. This came despite dovish comments from Fed Chair Jerome Powell as the central bank symposium in Jackson Hole Wyoming. US homes sales declined on Friday, surprising the markets, but the news was overwhelmed by the Presidents Tweets.

Trump Comments Send Market Reeling

President Trump said he was ordering US companies doing business in China to explore relocating their operations. His commentary came right after Fed Chair Powell said he would be vigilant about rates in the face fo a trade war. While President Trump has no authority to force companies to seek alternatives to Chinese supply chains.  It is clear that the trade war is not going to end any time soon and President Trump has not been able to deescalate these issues. Additionally, there are a number of Fed governors that are hawkish that see the economy as strong which creates a divided federal reserve. This means that rates if they move lower, will be done at a slow pace. There is a high bar for lower interest rates which could put the US into a recession before the Fed has a chance to cut rates.

Yield Curve Inverts

The 10-year Treasury yield and the 2-year yield inverted Friday after President Donald Trump ordered American companies to steer clear of trade with China. The yield on the benchmark 10-year Treasury note was around 1.511%, while the yield on the 2-year Treasury note was at 1.513%, an inversion of a key segment of the U.S. yield curve. An inversion of the 2-10 yields is viewed by fixed income traders as a recession prognosticator. Inversions of that part of the curve have predated every recession over the past 50 years and the last five 2-10 inversions have all led to recessions.

New Homes Sales Drop

US New Home Sales declined according to the Commerce Department dropping 12.8% to an annual rate of 635,000 units last month. It was the biggest monthly decline since July 2013. Expectations had seen the sales pace of 649,000 units.

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