Every Which Way

Every which way.  Equities posted a mixed close with the Dow and S&P 500 reaching new records, despite a surprise jump in inflation.  The markets spent the day responding to a trove of information from tweets to speeches to economic releases.

MY TWO CENTS

1.  Wait… what? Just when everyone thought inflation was no longer a thing, it became a thing again… for bond investors only.  Yesterday morning, the Bureau of Labor Statistics released its Consumer Price Index for June, and the year over year number excluding food and energy came in at a higher than expected 2.1%.  Its monthly increase of +0.3% was the largest increase since February 2018, when inflation was still somewhat of a concern.  The jump in inflation would typically be interpreted as a negative for those betting on a rate cut, though the number was largely shrugged off by stock investors who instead pushed the major large cap indexes to new highs, led by Pharmacy Benefit Administrators and Health Insurance Providers after the Trump Administration announced that it would abandon plans requiring drug rebates.  Bond traders responded to the surprise inflation number by selling off… quickly.  Inflation means investors need more yield to make up for rising prices of goods.  In the bond world, you get more yield by pushing bond prices lower.  The selling manifested itself further as a 30-year treasury bond auction showed weak demand.

2.  The chorus grows louder.  An increasing number of voting Fed Governors seem to be in agreement with Fed Chair Powell’s description of economic weakness in need of stimulus.  Yesterday’s was a big day of speaking and the Fed members that count all appeared to be in the camp of a safety cut.  Though many expect a -25 basis point cut, especially in light of yesterday’s inflation number, the probability for a -50 basis point cut is increasing by the day, according to Fed Funds Futures. The next FOMC meeting is in 20 days, and a lot can happen in that time.

THE MARKETS

Stock markets closed mixed yesterday with the large caps leading the charge to new record highs.  The S&P 500 closed at a record high trading up by +0.23%, the Dow Jones Industrial closed above 27,000 for the first time jumping up by +0.85%, the Russell 2000 slipped by -0.46%, and the NASDAQ 100 dropped by -0.08%.  Bonds fell by -0.28% and 10-year treasuries jumped by +7 basis points to 2.13%, which proves that bonds are not as sleepy as many think.  Another sign that the bond market is paying attention can be seen in the change in the yield curve shape.  In response to yesterday’s inflation number, the 3-month/10-year curve steepened by +11 basis points leaving it inverted by only a half a basis point.  Crude oil traders had a tough day factoring in the tropical storm in the Gulf, which affects 20% of US capacity, and an OPEC report which showed further weakening in demand.

WHAT’S NXT

- This morning, we will get the Producer Price Index which details prices of goods as they leave their place of production.  Year over year PPI is expected to have fallen from 1.8% to 1.6% and the PPI excluding food and energy is expected to have fallen from 2.3% to 2.1%.

-  Bajer Hughes rig count is expected to show a drop from 963 to 957.33 rotary rigs.

-  Chicago Fed President Charles Evans will speak.

-  Next week we will get some regional fed reports, retail sales, industrial production, some housing numbers, the Leading Index, and University Of Michigan preliminary sentiment.  The earnings release schedule picks up next week and there is lots more Fed speak on tap.

Have a great weekend!

daily chartbook 2019-07-12