The Coming Volatility Explosion

Some of those shutdown-delayed economic reports are finally coming in. The Census Bureau and the Bureau of Economic Analysis (BEA) should have most economic reports updated by the end of April.

Last Friday, the BEA released the December Personal Income figures. With that, there’s some good news and some bad news…

Spending in December declined, as expected. It fell 0.5% – worse than the predicted drop of 0.3%. But income rose a healthy 1% compared to the anticipated 0.4% rise.

The bad news… January income fell 0.1% on the expectation of a 0.3% rise.

Then there’s the mixed bag of the sousing sector…

The housing sector was in a downtrend for a good chunk of 2018. And it’s likely to continue to falter as we move through 2019.

Housing starts and permits were updated for December. Like the poor existing home sales figures, housing starts collapsed by 11.2%. Permits increased by 0.3%, which was better than expected. Maybe that’s a sign that starts will be better in January? Only time will tell…

Year over year, housing starts tumbled 10.9%. That was the biggest drop since 2011.

Last week, January pending home sales had rebounded more than expected on the month, up 4.6% versus the 1% expectation. But on the year, pending home sales were still down 2.27%. This is now 13 straight months of declines.

Mortgage rates declined on the month, too. So, it stands to reason that sales should rise.

That’s some much-needed good news. Especially for an economic sector that’s a bellwether to the direction of the economy.

GDP better than expected…

The much anticipated fourth-quarter gross domestic product (GDP) report was updated last Thursday. It included information for the advance release and the preliminary release and was better than analyst expectations.

GDP grew at an annual rate of 2.6%. That’s better than the 2.2% consensus expectation.

The GDP update also showed that consumer spending grew by a strong 2.8%, despite a sharp drop in December spending.

But if spending doesn’t pick up the pace a bit, I expect GDP to slow down even further.

In fact, the Atlanta Fed’s GDPNow estimate that was updated Monday for the first quarter of 2019, stands at a measly 0.3% rate of growth.

Low volatility, fewer opportunities…

Since January, volatility has dropped off a cliff.

Until Friday’s jump in yields, the long-term Treasury yield bounced between about 2.99% and 3.07% in the last two months.

Lower volatility means that the market is getting, or is already, complacent. Sooner or later, when there aren’t expected to be any surprises in any market – not just in Treasurys – the market will get shocked. When it does, volatility will explode!

And we’ll be ready when that happens. Remember, for Treasury Profits Accelerator, volatility is our bread and butter.

It’s not like there isn’t anything going on in the world…

Here in the U.S. alone, political infighting is getting worse by the day.

Negotiations with the North Koreans to eliminate their nuclear weapons are going nowhere.

And the trade deal with China to open up its markets and eliminate unfair trade practices is coming to a close one day, then sparking another trade war the next.

Things are happening. Only they’re happening without decisiveness, and the markets seem to be reacting in a similar fashion.

The Treasury market isn’t so worried about trade or geopolitical risk. But it does move on economic data that has been delayed because of the government shutdown. What data that has come in suggests that the economy looks to be slowing and the Federal Reserve will not hike rates anytime soon. As I said, the delayed economic reports should be up to date by the end of April.

The MOVE index…

According to Bloomberg, the MOVE index – which tracks volatility of the one-month Treasury – volatility is at a 28-year low. On top of that, volatility measures for foreign exchange, stocks, and emerging markets have also dropped sharply since the end of 2018.

The market seems to be telling us there’s no chance of any big moves in the Treasury market, despite increasing geopolitical tensions and weakening economic data.

The central bank of the world, our Federal Reserve, has reinforced this idea with its continued easy money policies. Fed Chair Jerome Powell testified before Congress this week and said our economy is doing great… but monetary policy will be determined by incoming data. So far, inflation has been muted and jobs are plentiful.

The Fed Chair also noted that growth has slowed in some major foreign economies. Particularly in China and Europe. He also noted risks to the global economy because of the uncertainty in the Brexit outcome and trade negotiations with China.

The markets are getting complacent, if they’re not already, by betting that Fed policy will only accommodate those less than desirable outcomes to any possible risks.

I’m betting that this will end soon.