Wall Street Breakfast: All About That Yield Curve

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Recession fears took hold yesterday as short-term Treasurys paid more than long-term notes, a warning sign that investors are rapidly shifting their money into bonds to shield against potential losses they could incur by holding equities. No trouble? A brief inversion could be just an anomaly (others have not preceded recessions), but it may depend on how long the condition lasts. Others say the inversion occurred because of the Federal Reserve, which has kept its base short-term rate “too high,” while some maintain the yield curve has been distorted by more than $15T worth of foreign bonds that pay negative interest rates.

Selloff continues

The inversion sent all three major U.S. indexes down about 3% on Wednesday, with the Dow plunging 800 points and suffering its largest decline of the year. The yield on the 30-year Treasury also went into uncharted territory: below 2%. Despite the market meltdown, U.S. stock index futures posted solid gains overnight, before turning around on events in Asia. China’s finance ministry said it must take necessary measures to counter the latest U.S. tariffs on $300B of Chinese goods, while Hong Kong cut its GDP growth forecast to potentially flat for the rest of the year.
Go deeper: Chris Ciovacco compares historical selloffs.

Data dump

A slew of U.S. economic data this morning will be closely watched for signs of a slowdown and how much substance there is to recession fears. The releases at 8:30 a.m. include retail sales for July, the Philly Fed manufacturing survey, the Empire State manufacturing index and initial jobless claims. Numbers on industrial production will come 45 minutes later, as well as the National Association of Home Builders’ Housing Market Index at 10 a.m.

Retail reality

The sector was walloped yesterday by weak guidance from Macy’s (NYSE:M) as department stores continued to lose shoppers to newer forms of retailing. Shares tumbled 13% after the company lowered its full-year earnings outlook and missed profit expectations. Worries were also seen after Cisco’s (NASDAQ:CSCO) Q2 results, which showed struggles in China amid a continuing trade war. Today brings more insight into the retail industry, with quarterly figures from Alibaba (NYSE:BABA), Walmart (NYSE:WMT) and J.C. Penney (NYSE:JCP).
Go deeper: Key data on Walmart ahead of earnings.

Buffett bets on Amazon; Ackman bets on Buffett

Berkshire Hathaway (NYSE:BRK.A) boosted its stake in Amazon (NASDAQ:AMZN) by 11% during the second quarter, increasing its bet on the online retailer even as stocks traded near record highs. It ended June with 537,300 AMZN shares worth about $1.02B, up from 483,300 shares three months earlier. Meanwhile, Pershing Square Capital Management, run by Bill Ackman, has taken a Berkshire stake of 3.5M class B shares (NYSE:BRK.B), according to its 13F filing.
Go deeper: Historical performance of Berkshire shares.

Testing IPO appetite

WeWork owner, The We Company, has published detailed financial statements for the first time, disclosing breakneck revenue growth and soaring losses, as it prepares for an IPO as early as next month. The company will list under ticker “WE,” and could raise several billion with the offering. Other high-profile IPOs this year, like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT), have fared poorly after their launch, amid skepticism over their lack of a concrete plan to profitability.
Go deeper: John Engle comments on WeWork’s ‘crazy valuation.’

The SNC-Lavalin affair

Prime Minister Justin Trudeau violated the country’s Conflict of Interest Act, according to Canada’s ethics watchdog. He attempted to influence former Justice Minister Jody Wilson-Raybould to overrule a decision not to grant a deferred prosecution agreement to SNC-Lavalin (OTCPK:SNCAF), a major employer in the politically important province of Quebec. The findings are a blow to Trudeau and his incumbent Liberal government before October’s general election.
Go deeper: Holdings of the iShares MSCI Canada ETF (NYSEARCA:EWC).

Wednesday’s Key Earnings

Canopy Growth (NYSE:CGC) -10.9% despite harvest gains.
Cisco (CSCO) -7.7% AH giving a soft outlook.
Embraer (NYSE:ERJ) -7.8% seeing a loss in 2019.
Macy’s (M) -13.2% dinged by light guidance.

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