We have been describing many of the macroeconomic and geopolitical issues impacting the financial markets as the “Axis of Worry”. Issues such as rising interest rates, the trade dispute between the U.S. and China, and the U.S. government shutdown can sometimes dominate the news headlines and impact stock prices more than whether the individual companies have good or bad quarterly earnings. We have viewed many of these big picture issues as transitory and advised on focusing on industry and company fundamentals.
The two current issues headed toward a wall (pun intended) are the domestic issue over whether the partial U.S. Government shutdown resumes on February 15th and the international issue of whether the U.S. and China can reach a trade agreement before previously scheduled trade tariffs go into effect on March 1st.
The President signed legislation to temporarily end the partial shutdown on January 25th and if no budget compromises are reached, the partial shutdown would resume on February 15th. There was optimism this past week that lawmakers would find a compromise, but that seemed to dissolve over the weekend. The remainder of this week is open for talks and we will monitor the progress.
The international tenor went the opposite way. It seemed at one point last week that a chance to negotiate U.S. – China trade was slipping away, but talks have resumed and there is speculation that Presidents Xi and Trump will meet in coming weeks, though likely after the March 1st deadline.
Dissecting Headlines: What is a Yield Curve?
Interest rates whether for savings (bank accounts, CDs, bonds) or borrowing (mortgages, car loans, credit cards) are all set at some relative spread to government interest rates at various points in time. When all the interest rates for U.S. Government notes and bonds are plotted on a graph by years-to-maturity they make a curved line known as the Yield Curve.
The earlier maturities at three-months or one-year impact interest rates for banks accounts and credit cards. The middle part of the curve at two-years to five-years impact bonds and CDs at those maturity dates and intermediate term debt such car loans. The longer part of the curve at 10-years impacts longer term bonds and mortgages.
The interest rate announcements from the Federal Reserve impact short-term interest rates and economic factors and the fixed income market impact long-term rates.
Want a printable version of this report? Click here: NovaPoint Feb 11 2019
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