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June 3, 2019, 9:31 a.m. EDT

Get set for U.S. bond yields to skid much lower, warns J.P. Morgan

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By Barbara Kollmeyer, MarketWatch


AFP/Getty Images
Keep going…

Investors are diving for cover as a new month kicks off, and trade tensions pop up like moles.

“The bigger issue for markets is that firstly Trump is sending a message that perhaps he is prepared to tolerate a lower stock market,” Chris Weston, head of research at Pepperstone, told clients in a note that refers to a threat by the president to slap Mexico with tariffs. The threat, which caught most investors off guard last week, may turn into a costly “significant headwind” for U.S. businesses and markets, he says.

Note, Morgan Stanley is now warning that all those tensions could trigger a U.S. recession in less than a year, and Goldman Sachs is also apparently talking escalation. No surprise then, to see the probability of a Federal Reserve interest rate cut for July has leapt to 50%, according to the CME Group’s FedWatch tool .

Naturally, a boatload of data coming this week will be watched closely, starting with U.S. manufacturing numbers later.

Our call of the day comes from investment bank J.P. Morgan, which has slashed its forecast for where the yield on the 10-year Treasury note could end up this year.

That’s as investors move into the perceived safety of government bonds this morning and out of what they see as risky, such as stocks and oil.

The bank sees the 10-year yield hitting 1.75% by year-end, in a note sent out after President Trump’s Mexico tariff decision. Yields, which move inversely to price, have dropped sharply in the past month on rising worries that a global trade war will hit the U.S. economy. That has, in turn, put pressure on the U.S. Federal Reserve to anticipate any slowdown and cut interest rates.

The note, led by analysts Matthew Jozoff and Alex Roever, says “the damage to business confidence could be lasting,” regarding Mexico tariffs. They are penciling in a quarter point cut in their third quarter gross domestic product outlook to 1.5%.

“The greater worry — which could prompt a larger revision — is that capital spending weakness morphs into hiring caution, and from there into consumer spending,” the analysts said.

Last week, one recession predictor hit a level not seen since 2007. Yields on the 10-year note have fallen below those of the three-month — referred to as a inverted yield curve. That means investors fear the future and are willing to pay less for short-term bonds over long-term ones.

Read: Can Trump’s trade tussle sink a shot at the longest economic expansion in history?

The market

The Dow /zigman2/quotes/210598065/realtime DJIA +1.30%  , S&P 500 /zigman2/quotes/210599714/realtime SPX +0.27%   and Nasdaq /zigman2/quotes/210598365/realtime COMP -0.39%  have opened mostly lower as trading kicks off. More coverage in Market Snapshot.

The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.70%  is down to 2.11% and gold is firm. The dollar /zigman2/quotes/210598269/delayed DXY +0.09%  is down, along with oil prices .

Europe stocks /zigman2/quotes/210599654/delayed XX:SXXP +0.30% are lower, and Asia was sluggish, led by the Nikkei /zigman2/quotes/210597971/delayed JP:NIK +1.88% . A private survey showed flat China factory activity.

The chart

Our chart of the day , from strategists Jim Reid and Craig Nicol at Deutsche Bank, sheds some light on that rough May for stocks. Their first chart shows the dismal May performance for many global financial assets. But the second chart rounds up the year-to-date performance, and shows 36 of the 38 assets they sampled are still seeing a positive return in U.S. dollar terms:

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,791.44
+357.96 +1.30%
Volume: 362.50M
Aug. 10, 2020 5:12p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,360.47
+9.19 +0.27%
Volume: 2.57B
Aug. 10, 2020 5:12p
loading...
/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
10,968.36
-42.63 -0.39%
Volume: 3.70M
Aug. 10, 2020 5:16p
loading...
/zigman2/quotes/211347051/realtime
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
0.58
-0.0041 -0.70%
Volume: 0.00
Aug. 11, 2020 3:08a
loading...
/zigman2/quotes/210598269/delayed
US : U.S.: ICE Futures U.S.
93.67
+0.09 +0.09%
Volume: 0.00
Aug. 11, 2020 2:58a
loading...
/zigman2/quotes/210599654/delayed
XX : STOXX
364.65
+1.10 +0.30%
Volume: 0.00
Aug. 10, 2020 11:03p
loading...
/zigman2/quotes/210597971/delayed
JP : Nikkei
22,750.24
+420.30 +1.88%
Volume: 0.00
Aug. 11, 2020 3:15p
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