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Jan 9, 2019

Markets: Goldman Sachs Lowers Forecasts for Yields, Fed

The Wall Street Journal.
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Hello. Amrith Ramkumar here setting up today's trading as investors look to see if stocks can extend a recent rebound
U.S. stock futures are rising. We'll get minutes from the Fed's last meeting this afternoon, with some investors hoping they show more of a cautious outlook from the central bank. A number of Fed officials are also delivering fresh comments today.
With more swings in the bond market expected as investors adjust their rate expectations, our Daniel Kruger explains why Wall Street analysts are saying yields have already peaked. 
 

Markets in a Minute

Markets Data
 

Overnight Developments

 

Why Goldman Says Yields Have Topped Out

By Daniel Kruger, bond market reporter
One of Wall Street’s most prominent bond bears now thinks yields have peaked.
Goldman Sachs economists said Tuesday that weakening economic data combined with tighter financial conditions and investors’ diminished appetite for risk have led the firm to lower its forecasts for interest-rate increases and U.S. government bond yields.
Benchmark Treasury yields, which help set borrowing costs for consumers, businesses and state and local governments, may have reached their highs for this economic cycle, the economists said in a report Tuesday. They predict the yield on the 10-year Treasury note will end 2019 at 3%. That’s higher than Tuesday’s close of 2.716%, though lower than the multiyear high of 3.232% reached in November.
Goldman also lowered its forecast for government bond yields around the world, including in Australia, Germany and Japan. Yields fall as bond prices rise.

Goldman Sachs’ forecast is significant because the firm had, until recently, been one of the more hawkish forecasters of Federal Reserve policy. In November, economists at the firm had predicted policy makers would raise interest rates four times this year. At its meeting last month, Fed officials lowered their own forecast, penciling in two rate increases in 2019, down from the three they predicted in September.
The Fed’s tone has moderated recently, and Goldman expects policy makers to adjust their approach should data show signs of economic weakness. Because investors’ risk appetite has waned recently, Fed officials and central bankers around the world are likely to adopt a more cautious tone in their efforts to adopt more traditional monetary policies, Goldman’s report said.
Goldman also expects that the U.S. dollar will weaken against other currencies as the Fed adopts a slower pace of rate increases, the firm said in a separate report. The dollar’s climb last year surprised many investors, spurred by a U.S. economy that grew faster than those of many other developed nations and four rate increases. Higher interest rates typically attract investors to a currency.
Other investors and analysts have also said yields may already have reached their highs. Bank of America recently lowered its 2019 forecast for the yield on 10-year Treasurys to 3%, and is predicting the Fed will raise rates two more times. Janney Montgomery Scott recently said the Fed is likely to pause and may halt rate increases, the credit cycle is turning and intermediate to longer-term interest rates have likely peaked.

Market Facts

  • U.S. crude climbed for the seventh consecutive session on Tuesday, its longest such streak since July. Oil prices have bounced back 17% from their Christmas Eve lows, though they are still 35% below their Oct. 3 multiyear peak.
     
  • Less than half of Wall Street analysts tracked by FactSet have "buy" or equivalent ratings on Apple shares for the first time since the start of 2006, according to FactSet.
     
  • On this day in 1790, Treasury Secretary Alexander Hamilton submitted to Congress his "Report on the Public Credit," which proposed buying up distressed bonds to consolidate the national debt. U.S. and state bonds, which had been trading at a fraction of their value, immediately surged in price. In one of the earliest cases of insider trading, several members of Congress hired sailboats and stagecoaches to take them south faster than the news could travel by foot. They snapped up bonds at bargain prices before Southern newspapers spread the news of Hamilton's proposals.

Key Events

The Atlanta Fed's Raphael Bostic speaks at the Chattanooga Chamber of Commerce’s 2019 Economic Outlook Breakfast at 8:20 a.m. ET; the Chicago Fed's Charles Evans speaks on monetary policy and the economy at 9 a.m.; and the Boston Fed's Eric Rosengren speaks on the economic outlook at 11:30 a.m.
The Bank of Canada releases a policy statement at 10 a.m.
Crude-oil inventories are scheduled for 10:30 a.m. Stockpiles are projected to have fallen 1.8 million barrels last week, per the average forecast of 10 analysts and traders surveyed by the Journal. 
Federal Reserve minutes from the Dec. 18-19 meeting are released at 2 p.m.
China's consumer-price index for December is out at 8:30 p.m.
 

Must Reads

During shutdowns in 1995, 1996 and 2013, the SEC was able to draw on surplus cash to remain open. PHOTO: JONATHAN ERNST/REUTERS
The government shutdown has frozen the IPO market, imperiling expectations for 2019. The government shutdown and the halt in the work at the SEC is threatening to spoil what was poised to be a banner year for IPOs.
World Bank: Global growth will lose momentum this year. The World Bank cut its forecasts for global growth in 2019 and 2020, citing a worsening set of factors from trade tensions to financial-market instability to currency challenges in a number of emerging markets.
American stocks get tied to the rest of the world. The great decoupling of the American stock markets from the rest of the world was the story last summer. Was last month the start of a great recoupling, where investors should bet on the U.S. falling back in line with global market performance?
AmEx suspended a director in its foreign-exchange pricing probe. Foreign-exchange employees at American Express Co. were informed last month that Taylor Simonin was suspended. He oversaw account development staff who help foreign-exchange salespeople and assist clients with currency conversions.
Saudi Arabia is edging toward a bet on the booming U.S. energy sector. Saudi Arabia is nearing a deal to invest in U.S. liquefied natural gas, a landmark decision for the kingdom which in the past had been a huge supplier of energy to America.
MetLife CEO Steven Kandarian will retire in April. The nation’s second-biggest life insurer by assets will turn over the reins to top lieutenant Michel Khalaf, though Mr. Khalaf won’t inherit the chairman title. Instead, the new position of nonexecutive chairman will go to current independent lead director Glenn Hubbard.
 

What We've Heard on the Street

“Carlos Ghosn won his spurs turning Nissan around in the early 2000s. Now the Japanese car maker needs an even more sophisticated turnaround artist.”
—Heard on the Street columnist Stephen Wilmot
 

Stocks to Watch

Skyworks Solutions: The chip maker lowered its quarterly sales and profit targets, citing weakness among smartphone customers. Shares have tumbled lately alongside other semiconductor stocks, including an 11% slide Jan. 3 following Apple’s quarterly revenue cut.
Walmart: The retail giant climbed for the eighth time in the last nine sessions Tuesday after it said late in the day that it will test a grocery delivery program with self-driving vehicle startup Udelv.
Deere: Industrial shares tied to the global economy could swing after the World Bank cut its forecasts for global growth in 2019 and 2020 late Tuesday.
Concho Resources: The energy company has climbed at least 2.6% in the last three sessions with oil prices hitting their highest level since Dec. 17 and trimming some of their recent slide.

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