Zig Zag - went the markets yesterday as they appeared to find and lose their way several times throughout the session. The day started out with some encouraging news in a benign, lower than expected Producer Price Index. Good enough for a positive but muted open. The Dow dipped into the red by 10:30 and just when you thought the day would be a bust, news of fresh trade talks with China were mysteriously “leaked” to the press, and Voila! The Dow was up as much as 170 points (a bona fide resistance line around 26617). All markets rallied on the news but, as you must know by now, the Dow Jones Industrials was the most impacted index. The excitement didn’t end there. Though the news was confirmed, markets soon lost steam taking all indices back into the red by mid afternoon. A late session rally enabled both the Dow and S&P500 to close slightly higher leaving the NASDAQ 100 and Russell 2000 slightly under water. Basically it was a lot of work for very little progress. But hey, it’s a living. All of the major indices remain constructive and the Dow Jones’ is inching its way back into a better position. Once again, the Dow’s health appears to be chained to the trade war narrative. Speaking of the trade war narrative, the Federal Reserve released its Beige Book yesterday, which details economic conditions throughout the country. It is usually not a show stopper but it offers quite a bit of detail for those who have the patience to parse its contents. The report showed some pockets of weakness with 3 of the 12 reporting districts displaying weaker growth. The report also revealed that tariffs and labor shortages are the top two concerns. Ports in the country’s eastern districts are concerned about tariff effects if the trade war continues to escalate. Hmm, maybe it's time to reach out to China and request a new round of trade talks… and let the press know. Apple released its new lineup of iPhone-related products yesterday, which was underwhelming to investors and Micron Technologies took a hit after a downgrade in response to soft chip demand which held back an already weak tech sector. Apple and semiconductors both have significant influence on the NASDAQ and they served to extinguish Tuesday’s momentum leaving it with a close below 7500.
The Producer Price Index, released yesterday, is a good leading price indicator because it measures inflation earlier in the product cycle, at the factory. You have heard me use the economic term “rational producers” before and it is a fancy way of saying “most companies will eventually react…”. So rational producers will raise prices to consumers if their costs go up - inflation. So yesterday’s PPI came in lower than expected, which should have been good news for bond holders and bad news for the growing number of hedge fund short sellers. Many speculative traders have been shorting longer maturity treasuries as they believe that bonds are currently overpriced for a Fed rate hiking regime. That means they are thinking (and hoping) that bonds will eventually sell off making their short positions profitable. So far they have been wrong and even as they have come down a bit in recent sessions, the big move back to the 3.12% high of early summer continues to elude. Bear in mind that short treasury positions must be financed in the repo market (more on that in some future geek-out Wednesday) and while short term rates are going up, helping to finance those positions, there are still costs being incurred. For the other geeks out there, the current overnight rate is 2.03% and the current 10 year coupon is 2.875%, so the cost of financing is 0.845% annually. Ok, ok back to reality. Today we will get the Consumer Price index (CPI), which is expected to show a year over year growth of +2.8% and +2.4% for the core (ex food and energy). The CPI can cause some volatility with outlier releases but, for the most part, we can expect lots of discussion around trade policy and video loops of hurricane maps today, which translates to more zigging and zagging… or is it zagging and zigging.