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Top 10 Market and Economic Variables to Watch…and 3 to Ignore – Part II

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A couple weeks ago we told you the first of 10 variables to look for in the economy – Earnings Momentum and High Yield Spread. Here are the next four variables.

8. The Bond Market

The bond market, specifically, the 10-year Treasury note, may offer clues on the direction of the economy. Since the U.S. bond market is the largest and most liquid market in the world, the 10-year Treasury has often been used as a “fear” trade. When global uncertainty looms, investors seek a safe harbor against uncertainty and move into the U.S. bond market. As prices increase and yields move lower, this move has been an indicator that economic growth is in question.

The most recent trading range of the 10-year Treasury note has been between 2.4 and 3.0 percent, suggesting we will see moderate economic growth for the remainder of the year. Due to improving economic activity, a stable employment horizon and a hint of inflation, we think the 10-year Treasury will close the year around 3 percent.

7. Help Wanted Signs

Inflation can come in many forms, such as commodity inflation, wage inflation, and so on. The Federal Reserve (Fed) focuses on an inflation index called the “core personal consumption expenditures”(PCE), which excludes food and energy. Historically, food and energy inflation have been very volatile, and therefore are excluded in this index. We think wage inflation is the sustainable inflation. U.S. average hourly earnings have grown less than 2.5 percent each year for the last five years.  However, as the labor market tightens, we would expect some wage inflation. Job openings peaked in 2007 prior to the Great Recession.

Since 2009 job openings have been on the rise.  As the labor market gets tighter, we think it will lead to a continued increase in core inflation.

6. Commercial and Industrial (C&I) Lending Standards

Banks and credit are the lifeblood of the economy. When credit is readily available, business owners are more willing to expand their business and hire workers. Lending standards lead payroll growth by approximately nine months. In the middle of the recessions in 2001 and 2008, lending standards improved, and it was a clear signal that job growth was right around the corner.

The Fed’s Senior Loan Officer Surveys measure the tightening or loosening of loan standards, and there has been a dramatic improvement since 2010. C&I loan growth is up over 10 percent so far this year and we have seen an average of 215,000 jobs created each month in 2014, substantially better than last year.

5. The Slope of the Yield Curve

The shape of the yield curve (the difference between short and long rates) gives insight to economic growth. A very steep yield curve would indicate strong economic growth prospects, and an inverted yield curve (short rates higher than long rates) has an impressive track record of predicting an oncoming recession. The yield curve inverted a year prior to the recessions in 1980, 1981, 1991, 2001 and 2008. In fact, in the past half century, the yield curve has inverted prior to each recession.

Even though we saw the economy contract in the first quarter of 2014, we are confident that this is an anomaly since the yield curve is so steeply sloped.

Later this month, we’ll bring you the rest of the Top 10 variables to watch.

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UMB Private Wealth Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals.  UMB Financial Services Inc * is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Banking and trust services offered through UMB Private Wealth Management, a division within UMB Bank, n.a.

This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Private Wealth Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Private Wealth Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Private Wealth Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Private Wealth Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

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K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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The Calm after the Storm? Or the Eye of the Storm?

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Recently UMB Bank Chief Investment Officer KC Mathews and his team connected with clients to discuss some of the market’s most pressing issues. The Fed tapering, our interest rate forecast, the recent movements in the municipal bond market and an updated economic outlook were discussed.

Interested in what was discussed? Listen to the podcast here.

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UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.*  is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.

*Investment Products Offered Through UMB Financial Services, Inc

Member FINRA, SIPC

NOT FDIC INSURED/ NO BANK GUARANTEE/ MAY LOSE VALUE


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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