Pre-market equities: Bonds send a clear message about the economy

What’s going on ? The yield on benchmark 10-year U.S. Treasuries — which move opposite to prices — jumped to 3.36% on Monday, its highest level since 2011.

But the yield on the 2-year Treasury rose further as investors also dumped those notes. This created an unusual phenomenon called “yield curve inversion”.

Breakdown: Typically, longer-dated bonds yield more than shorter-dated bonds. It is more difficult to predict what will happen in the future, and investors want to be compensated for this additional risk.

Former Fed Chairman Ben Bernanke told CNN’s Fareed Zakaria on Sunday that he believed Jerome Powell, the current Fed chief, could still bring inflation down without causing a recession.

“Economists are very bad at predicting recessions, but I think the Fed has a decent chance – a reasonable chance – of achieving what Powell calls a ‘soft landing,’ either no recession or a very mild recession for lower inflation,” Bernanke said.

Bond traders, for their part, seem more skeptical. An inversion of the yield curve has preceded every recession since 1955, according to a study by the Federal Reserve Bank of San Francisco.

In Europe, the bond market is also showing signs of anxiety.

The spread between German and Italian 10-year government bond yields was at its highest since March 2020 on Monday, according to Tradeweb. The same was true for German and Greek 10-year bonds ahead of a public holiday in Greece on Monday.

It indicates that the European Central Bank – which announced last week that it would raise interest rates in July for the first time in 11 years – could put a strain on heavily indebted EU countries by increasing costs. of borrowing. The longer they have to pay debt service, the fewer other ends they have.

“It’s definitely a concern,” Andrew Kenningham, chief economist for Europe at Capital Economics, told me.

At the end of 2021, Greece had the highest debt-to-GDP ratio in Europe at 193%. Italy followed with 151%.

Europe is in better shape than it was the last time the ECB started raising rates as the region’s debt crisis approached.

Greece’s economy, in particular, has exceeded growth expectations, and it has favorable terms on its debt that make repayment less of a concern. But this is not the case in Italy, which will have to refinance its debts earlier and where growth is lagging.

“Italy has not done enough serious reforms,” ​​said Holger Schmieding, chief economist at Berenberg Bank.

The ECB said it would step in and resume bond purchases if the situation deteriorates rapidly. Still, it’s unclear exactly when it would kick in, making investors increasingly nervous.

“The ECB can contain the problem if it wants to,” Kenningham said. But they haven’t defined their “pain threshold”, he added.

US stocks end in a bear market

U.S. stocks ended Monday’s trading session in a bear market, with the S&P500 (SPX) closing more than 20% below the all-time high reached in early January.

The latest: Inflation and recession fears had eased somewhat at the end of May and equities regained ground. But Friday’s miserable consumer price report soured the mood again as investors worried about the Fed’s next moves.

This ended the stunning rally that stocks had been on since March 23, 2020.

Remember: stocks briefly fell into bearish territory on May 20. Then a late-day rally saved the market from closing below that level for the first time since the early days of the pandemic.

Now it’s official. The last bull market lasted just over 21 months – the shortest on record, according to S&P Dow Jones Indices analyst Howard Silverblatt. Over the past century, bull markets have averaged about 60 months.

Still, the latest iteration has been powerful, lifting the S&P 500 to a record 70 in 2021.

Cryptocurrencies also increased positive sentiment last year. Bitcoin hit an all-time high of nearly $68,790 last November.

It is now in freefall, hitting its lowest level since late 2020 on Monday, and slipping again on Tuesday. Two of the world’s largest crypto platforms have limited their activity amid the collapse, raising concerns about market stability.

Democrats call for windfall tax on oil profits

Last week, I wrote about how Exxon’s skyrocketing profits lifted its stock to its highest level in years. But it’s not just investors who pay attention.

Progressive Democrats are also banking on the good fortune of oil and gas companies as they look for ways to show they are working to deal with the fallout from runaway inflation.

Calls are mounting for Exxon and its peers to return some of their hefty profits to Americans struggling under the weight of rising prices, especially after the UK’s Conservative government introduced such a measure last month. .

“The oil companies are making record profits and yet they’re raising their prices at the pump. To me, that doesn’t make sense,” Robert Reich, who served as Secretary of Labor under President Bill Clinton, told CNN recently.

The White House might agree.

“It’s outrageous that oil and gas companies can take advantage of this and make four times the profits they made when there was no war,” Bharat Ramamurti, deputy director of the National Economic Council, said last week. . He did not rule out support for a windfall tax.

Big Oil pushes back hard. The American Petroleum Institute said in a statement that raising taxes on the industry would discourage investment in new production, which it said is “exactly the opposite of what needs to happen.”

“It is unfortunate that some policymakers continue to focus more on scoring political points with proven policies rather than coming up with solutions that could actually address the factors driving the price hike,” said the senior vice president of politics, economics and regulation of the industry lobby. business.

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The May Producer Price Index arrives at 8:30 a.m. ET.

Garland K. Long