You knew a morning like this was coming. You knew it. I knew it. Could see it coming from a mile out.
Maybe it's nothing, or kind of nothing. Maybe it's a speed bump. Might also be the turn of the worm.
We have been talking endlessly about signals. Some of them mixed. Debt markets have been telling us a story. Equity traders have been proceeding as if they were not. The tale told is not one of growth, and not even one of inflation.
The tale told by sovereign debt markets, domestic sovereign debt markets to be specific, is one of stalled economic growth, and maybe even of consumer-level inflation that may be past-peak. Disinflation? Would outright deflation shock right now? (Yes, it would surprise.. but since early 2020 nothing actually stuns me.)
You know you're paying more for most consumer goods, but I did tell you that I went grocery shopping for the family after two weeks in Florida, and was surprised that I paid less for a number of our "go to" food items than I had two weeks ago. That was a surprise. I leased a new car yesterday. Tried to wait. Went without a vehicle for 10 months. Those prices are not coming in.
So, global equity markets, global debt markets, commodity and crypto markets went into risk-off mode overnight. After all three U.S. major equity indices closed ever so slightly in the green on Wednesday, the S&P 500 and Nasdaq Composite (just by a smidge) at all-time record high closes. Small-cap stocks still sold off, as has become their recent norm. Another harbinger of stalling growth.
Why now? Why this morning?
For one, even though there was no immediate impact visible on Wednesday afternoon across U.S. stock markets. The Fed Minutes from the June meeting (run with a three week lag, so nothing real-time is in there) show that it has become increasingly clear that those sitting at the FOMC table are becoming far less certain in regards to the short-term trajectory of monetary policy.
Oh, there are more reasons to take some profits up here or reduce risk. Forget that our major equity indices had for the most part become technically overbought at the headline level, just look to Asia. With about two weeks (July 23) to go until the "2020" Summer Olympic Games are to begin in Tokyo, Japan, the Japanese government has declared a COVID-related "State of Emergency" for the Tokyo area. Prime Minister Suga says that the condition will expire on Aug. 22. The games? They wrap up on Aug. 8. Hmm. No fans. No fun.
In addition, the Bank of Japan, according to "sources" is now expected to reduce their forecast for economic growth while increasing expectations for inflation at their July 15 meeting next week. Sounds like "stagflation" to this old dog.
There's more. You may have noticed China's crackdown on big technology companies -- both Chinese companies operating anywhere and global companies operating in China. All while China harasses Taiwan almost daily with flights by military aircraft that either enter Taiwanese airspace or come right up to the edge of islands under Taiwan's control manned by small military units that would be difficult to support. That's called seeking a soft spot in an effort to make a statement or probably an attempt to test U.S. (and Japanese and South Korean) resolve.
Got a Minute?
What investors learned about "three week old" Federal Reserve thought on Wednesday was that basically that the FOMC is now akin to something similar to a group of monkeys throwing darts around an empty pub with a dartboard on one wall. Bullseye? More like Bull something else.
Can we blame them? No. Does that make anything better? Also, no. The resurgence of the SARS-CoV-2 virus has only increased the uncertainty as the Delta and other variants have made transmission of the infection easier among the unvaccinated, while also reducing the efficacy of existing vaccines .
Some Fed officials as of three weeks ago, saw the U.S. economy rebounding with enough vigor to start removing pandemic-era emergency stimulus sooner rather than later. By the way, in this column we started calling for the absolute halt to MBS purchases many months prior to even hearing about it anywhere else. Could have prevented at least the extreme spike in real estate valuations that have shut the younger and poorer among us from fully participating in the economic rebound. But, what the heck do I know? Just ahead of the Fed. Every. Single. Stinking. Time. The cast changes. The refusal to learn? That's a constant.
Some Fed officials hinted at a "tapering" on the early side, as the pace of vaccination boosted economic growth. What do they do now? Now, 22 days later, that infection appears to be on the rise again thanks to an inexplicable resistance to the vaccines at home and a lack of vaccination availability elsewhere that has permitted this virus to mutate as quickly as it needs to, in order to survive.
Now, we must face a strain that anecdotally appears to target those of any age, and not discriminate by age as did prior variants. We must do this with an entire nation (an entire planet) of unvaccinated children. I can think of nothing that frightens me more than a "children's pandemic." But, by all means, walk around unprotected, leaving your family and friends less protected by doing so, pretending that it can not happen to you or yours. May God be with us.
1) Bond markets have vetoed the reflation trade, casting doubt on both global and economic growth.
2) The virus is back on the rise. Everywhere... as made plain by actions taken in Japan.
3) China is enforcing state power over both foreign and domestic enterprises. This is key. The Xi regime values power above all else. Over money. Over everything. Leading to number four.
4) China is intentionally placing pressure on Taiwan's armed forces in an effort to test the current level of the U.S. commitment to Taiwanese independence. We show nothing now, the first casualties will likely be a handful of Taiwanese Marines stationed on islands well off the coast of Formosa.
5) Large-cap equities extended ever further into technically overbought territory as breadth withered. both the S&P 500 and Nasdaq Composite have gained ground in 10 of the past 12 days -- as breadth has been decisively negative at least at the Nasdaq for six of the past seven days hollowing out small-to mid-cap support, and as the momentum has returned to big tech and defensives over cyclicals,
The U.S. 10-Year Note went out on Wednesday afternoon yielding 1.32% after hitting resistance just below 1.30% earlier in the day. (Remember, for those new to debt markets, that price is inverse to yield, hence support is found at higher yields, and resistance at lower yields.) That late-day profit-taking was put to bed overnight as bond bulls poured back into these markets through the wee hours.
As I bang out this piece, 10-year paper has paid just 1.26% at one point, while the 30-year Bond goes for 1.89%, after that yield traded earlier with a 1.87% handle. As we move through the early morning, thanks to the absolute pinning of the short end of the curve, the three most important Treasury yield spreads that we watch have all flattened to a degree, but all still span well more than 100 basis points. The 3-Month/10-Year spread is down to 122 bps, the 2-Year/10-Year spread is down to 106 bps, and the 5-Year/30-Year spread is now just 114 bps.
While yield spreads like this do not exactly call for economic contraction, there can be no doubt that at least for now, the reflation trade has halted, the pace of economic growth is in doubt, and not only is consumer-level inflation possibly transitory, it may end up being a whole lot weaker than many pros expect. Remember what we've been talking about.
Labor markets are strikingly weaker than they should be at this point in the recovery. Even though about half of the states have tried to push participation through halting the weekly federal stipend to state-level unemployment benefits. What did we learn from the Institute for Supply Management this month? We learned that for the month of June, purchasing managers in the aggregate saw national employment to be in a state of contraction across both the servicers and manufacturing sectors.
We talk about pivot points all the time. Pivot points can act as resistance, or can provide a slingshot effect. The U.S. economy, the global fight against this virus, geopolitical concerns (including cybersecurity) are all reaching, simultaneously, their pivot points.
The Time Draws Near
Less time for talk now. You must defend yourself, and your family. You will need your wits about you this day, and perhaps for days, weeks, and months yet to come.
You can do this...
"Be still my heart, thou hast known worse than this." -- Homer
You already know how...
"There is only one sort of discipline, perfect discipline." -- George S. Patton, Jr.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 359K, Last 364K.
08:30 - Continuing Claims (Weekly): Last 3.469M.
10:30 - Natural Gas Inventories (Weekly): Last +76B cf.
11:00 - Oil Inventories (Weekly): Last -6.178M.
11:00 - Gasoline Stocks (Weekly): Last +1.522M.
15:00 - Consumer Credit (May): Last $18.61B.
The Fed (All Times Eastern)
No public appearances scheduled.