Morning Report: US banks pass stress test

Vital Statistics:

	Last	Change	Percent
S&P Futures	2067.7	0.9	0.04%
Eurostoxx Index	2838.7	6.5	0.23%
Oil (WTI)	48.86	-1.0	-2.04%
LIBOR	0.631	0.004	0.64%
US Dollar Index (DXY)	95.7	-0.069	-0.07%
10 Year Govt Bond Yield	1.50%	-0.02%
Current Coupon Ginnie Mae TBA	106.1
Current Coupon Fannie Mae TBA	105.4
BankRate 30 Year Fixed Rate Mortgage	3.54

Stocks are taking a breather after a ferocious two-day rally. Bonds and MBS are up. 

Initial Jobless Claims came in at 268k, up 9k from the previous week. Claims have now been below 300k for a year, which is an astounding run. 

In other economic data, the Chicago Purchasing manager index rose while the Bloomberg Consumer Comfort index fell. 

Last night, the Fed released the results of its stress tests and most, if not all, US banks passed. After the close, the tape was dominated by news of banks raising dividends and buybacks. Deutsche Bank failed to pass. Deutsche Bank's market cap stands at just under $19 billion, roughly the same size as M&T or Suntrust. Citi's market cap is $123 billion. This gives you an idea how hard the banking system has been rocked in Europe.

George Soros believes Brexit will be the catalyst to unleash a financial markets crisis. He believes it will be concentrated in Europe, where their economies are stuck in a deflationary trap, similar to Japan. His prescription is for European governments to adopt deficit spending en masse to boost aggregate demand. Of course Japan has been doing exactly that for over 25 years. All they have to show for it is negative interest rates, flat GDP and a debt to GDP ratio of 2.2x. He is also predicting a hard landing in China, which would add fuel to the fire. Punch line: Deflationary forces emanating out of Asia and Europe will keep the US dollar strong (which will dampen inflation in the US) and interest rates low. 

When talking about interest rates, it is important to remember that interest rate cycles are long. Below is a chart of long term Treasury yields in the US going back 90 years. The relevant comparison for the global economy right now is the 1930s. The crash was in 1929, (versus 2008) and rates kept falling for another 11 years. It looks like rates bottomed around 1940. Rates remained unusually low until the late 1950s. To put a parallel on that, we would be looking for rates to bottom out somewhere around 2020, and then have another 10 years where these exceptionally low rates increased only gradually. Note the trough-to-peak time was about 40 years. Of course history doesn't repeat - it only rhymes, however those looking for a cataclysmic top in the bond market might be waiting a while. 

Fun fact: There are now $11.7 trillion worth of bonds with negative yields right now. The notional amount of bonds with negative yields and maturities of 7 years or longer is $2.6 trillion. This number has doubled since April. The UK 10 year is still positive, yielding .95%, but who knows how long that will last. This is the thing to keep in mind: with global rates near or below zero, there will be a natural bid for Treasuries. It is inevitable as global investors sell bonds yielding nothing to buy bonds yielding something.