The Chairman of the Federal Reserve announced a change to how policy is conducted with regards to inflation which the market interpreted as lower for longer. Under this methodology, the interest rate increases which began in 2015 would have never happened. With rising inflation expectations due to monetary expansion (quantitative easing) and exploding deficits, the Fed is signaling they will maintain low rates and an accommodative policy despite how much our currency loses its purchasing power. Now, this is a plan and we all know the Mike Tyson corollary that everyone has a plan until they get punched in the face.
Where will the first punch come from? My guess would be the long end of the yield curve. Although record high gold prices could be considered the first jab as its rate of change to higher prices has been dramatic. Keep in mind that the rate of change is what takes investors by surprise. For example, it is much more palatable if the 30Yr Treasury bond yield gets back to 2.39% over the next two years than if that move happened in the next two months.
This is relevant to the chart below as we can see that Treasury yields are “catching-up” to the sharp rise in the S&P 500. How quickly the two converge will be something to watch in the coming weeks if the major indices continue to melt-up. A break above resistance at 1.694% in the coming week(s) would indicate a sharp convergence is underway and a caution flag for equities.
Let’s also take a look at the updated chart of the S&P 500 with the trend-line from 2009. As you can see, the trend line was tapped this week as the index closed at 3,509 on Friday. If this trend-line relationship holds, I expect one of three outcomes: 1) The S&P reverses and begins a pullback to work-off an overbought condition; 2) The trajectory of the index changes and begins to hug the trend-line like in 2013; 3) Stocks break-out and continue their sharp ascent higher into what will be a major top. This may all take months to play out and could center around the results of the Presidential election in November. Until then, the trend in equities remains to the upside.
Chart of the Week!
Several analysts have predicted above average hurricane activity this year caused by a weak “El Niño” current of warm air and water originating in the Pacific near South America. Some analyst have predicted eight or nine hurricanes to occur, up from just six in 2019.
Economic & Central Banking Snippets
- The Federal Reserve approved a major shift in how it sets interest rates, a move likely to leave U.S. borrowing costs very low for a long time. The decision to drop its longstanding practice of pre-emptively lifting rates to head off higher inflation won’t lead to a significant change in how the Fed is currently conducting policy. But the shift marked a milestone. Had the strategy been adopted five years ago, the Fed would have likely delayed rate increases that began in late 2015, following seven years of short-term rates pinned near zero. It amounts to the most ambitious revamp of the central bank’s policy-setting framework since the Fed first approved a formal 2% inflation goal in 2012. (WSJ)
- Initial jobless claims totaled 1.01mm, about in line with the estimate of exactly 1mm and this is down 100k w/o/w. Pandemic Unemployment Assistance did rise for the 2nd week to 608k up from 525k last week. Continuing claims, delayed by a week, was 14.54mm vs the estimate of 14.4mm.
- U.S. consumer confidence fell in August to a new pandemic low after a resurgence in coronavirus cases during the summer. The reading sank to 84.8 this month from a revised 91.7 in July, the Conference Board said Tuesday. Economists were predicting 93.0.
- U.S. new-home sales rose to the highest level since the waning days of the housing bubble, underscoring a strong recovery for the housing market as people search out more space while working and schooling at home. Sales of new single-family houses reached an annual pace of 901,000 in July, up almost 14% from the prior month and the highest overall level since December 2006. While growth appears to have eased in other sectors of the economy last month, housing is still going strong. That’s likely to generate positive knock-on effects, starting with construction employment and running through demand for lumber, appliances and furniture. (WSJ)
- Orders for durable goods rose for a third straight month in July as manufacturers boosted output and the economy continued its climb back from disruptions related to the coronavirus pandemic. “The recovery in business equipment investment looks pretty V-shaped to us,” said Michael Pearce, senior U.S. economist at Capital Economics. (WSJ)
- Another housing trend: Bigger is better. An analysis of sales data by Redfin shows sales grew nearly 10 times faster for large homes than small homes in July. More people are looking for space for work and leisure, even—or especially—if that means living farther from city centers. Prices, however, are still growing faster for smaller homes, showing the importance of affordability and the consequence of limited supplies for buyers, Redfin said.
- Germany on Thursday hit pause on any further loosening of coronavirus rules and introduced new restrictions, in the latest instance of a European nation moving to tackle a resurgence in infections driven by tourism and summer festivities. The new measures largely build on existing rules and aim to improve testing of people returning from high-risk countries, support the safe reopening of schools and limit gatherings and events that have proven fertile ground for Covid-19 clusters, William Boston reports. (WSJ)
- Bed Bath & Beyond is laying off 2,800 employees from across its corporate headquarters and retail banner stores.
- Amazon rolled out Amazon Halo, a health and wellness tracker that the company said also tracks its users’ emotions, in its latest foray into wearable products. The wristband and app track body-fat percentage, heart rate, and its users’ activity and sleep, among other features, Amazon said Thursday. (Investopedia)
- Fannie Mae and Freddie Mac will delay the implementation of their controversial new 0.5% refinancing fee until Dec. 1, according to the Federal Housing Finance Agency. The fee was previously scheduled to take effect Sept. 1. They will also exempt refinance loans with loan balances below $125,000 as well as HomeReady and HomePossible affordable products. (Investopedia)
- The Coca-Cola Company will offer 4,000 employees voluntary layoff packages as part of a workforce restructuring plan. It is also reducing the number of operating units to nine from 17 to help streamline the organization. (Investopedia)
That is all for now and thank you for being a subscriber!
President – Kisco Capital