While it was a few days ago, Friday’s news on the PPI continues to hold the Fed to their path leading to higher interest rates, at least short term rates. Meanwhile, the bond market decided to pop up driving interest rates on the longer end of the curve down a bit. Greenspan’s “conundrum” continues. The Fed, it seems, has no choice but to raise rates again next month but the bond market stays inverted.
Right now the rates on the curve predict a recession due to the inversion. Late Friday, the two-year Treasury was 0.12% more than the 10-year Treasury which was 0.03% more than the 30-year. You might see slightly different numbers but the point here is that the curve is inverted meaning the long bonds are arguing for a recession coming soon. Over the weekend there have been a number of articles talking about this very issue, some arguing that it’s different this time, others emphatically calling for recession.
Our position has been and continues to be that the recession has been delayed due to the expansionary tactics taken by both the government and the Fed. The government has done everything in its power to spend money and lower taxes while the Fed did what it could to promote asset inflation so it didn’t show up in the CPI. Since the economy has only responded by moving up 3% to 4% in the GDP, this strategy may not work very much longer. Once the government is in debt and the consumers are in debt, where do we go from there? We think the bond market knows.
The stock market has managed to get itself back to a slightly overbought condition even though the broader market can’t seem to catch up to the Dow. The Dow being over the big 11K figure is diverting attention from the rest of the market which is definitely lagging behind. We saw a great headline last Friday wondering why the big cap stocks hadn’t been participating in the rally. The big caps Never really went down like the NASDAQ stocks, the tech high flyers back in the early part of the decade. But, right now they are leading the pack and that is Not a good sign. The article seems to have missed the point just a little.
This week has a couple of items for the markets to consider such as the Leading Economic Indicators (LEI) on Tuesday and the CPI on Wednesday with durable goods orders coming out on Friday. We think the stock market will basically ignore all of them but we mention them just in case. Maybe we’ll know more after tomorrow. Until then, Be careful out there.
Dow Industrials: 11,115.32 -5.36