The stock market is rallying on the news that unemployment is moderating. Non-Farm Payrolls came in slightly less than expected. And, the unemployment rate increased. The easing of employment shows that the Fed’s work on increasing interest rates in order to combat inflation is having the effect of contracting the economy modestly – i.e., a soft landing. The news sent equity markets higher as the US 10-Year Treasury bond yield fell sharply (chart above).
My position is the same that we are a long way away from containing inflation and it sliding down to the 2.00% level the Fed is targeting. I do not believe that the Fed has achieved the level of interest rates that is necessary to achieve the goal of 2.00% inflation gains.
That being said, the fundamentals of the bond market – the driving force of the economy at this time – are shifting. We are no longer in the same economic landscape of the past where interest rates were in a low-level environment. The Federal Deficit is far too high to continuously sustain a low level of interest rates while simultaneously there are two 800 pound gorillas that are no longer eating – The Federal Reserve & China foreign reserves. As these two customers are no longer buying up the debt of the US Treasury at the same pace – if, at all, bond yields are rising.
The rise in bond yields is going to shift the economy into a new era that will mean lower growth rates, the most recent 4.9% GDP growth rate notwithstanding. Consumers will have less to spend with their higher debt levels. So, while the Federal Reserve may have short term interest rates at a level that will contain inflation, long term rates will also have an effect on the overall economy to contain inflation.
Non-Farm Payrolls & Unemployment Rate
As you can see in the charts above, the general trend is lower and lower for non-farm payrolls with a general trend higher in unemployment, if, but slowly. There was a revision to last month’s Non-Farm Payroll data point downward making last month’s number a little less fantastic.
Very likely with the longer end of the yield curve elevated with the oversupply of Treasury offerings, the Federal Reserve may not need to move short term rates any more. But, this is not necessarily a cause of celebration as the higher long end yields translate into lower overall growth rates for consumption, and by extension, the stocks.
Over the past week, SPY stock has continuously pushed higher and higher. SPY Stock hit bottom on Friday the 27th. Tentatively, given the Fed meeting on Wednesday and economic data today, SPY stock moved higher on interest rates moving lower. The bond market is likely to move sideways from this point and this will likely translate in to sideways action in the stock market. The yield on the stock market is ~3.85% at current levels of earnings – a lightly higher yield with future earnings. The 2 Year Treasury yield is a full 100 basis points higher. Investors would opt out of stock market in favor of the higher yield. This puts undo risk into the scenario of owning stocks.
If you factor in the fact that the economy is in the process of contracting somewhat, all of the future revenues for companies – along with what factors in to the yield, start to contract. There are better options to own bonds than stocks. For this reason, most stocks will continue to move sideways and downward overall.
The VIX moderated and this is something I have been playing on by selling call options on UVXY stock to bring in premium, selling Theta while considering direction overall. I expect that we should see a bottom in UVXY for now and that we continue to see small moves higher as some companies report lower-than-expected revenues and profits. While I do not see any kinds of big selling in the future, I can see a continued drifting lower and lower in stock prices which will keep UVXY stock somewhat elevated but pressured lower.
Bond yields have moved lower and from that TLT stock has shot up this week. I do not see this as a 0ne-way move upward but, a bottom in the current cycle. Ultimately, I see there being pressure on the yield to move lower and lower as the US issues more and more debt and the two biggest customers – the Federal Reserve & China Central Bank – shift their consumption. Because of this the price of savings is going to go higher.
With higher interest rates for longer, I do not expect that gold will remain elevated as carrying costs are going to weigh on holding a physical metal that returns nothing more than costs. Alternative investments are going to draw in investors in favor of owning metals that cost money to own.
I have been actively selling calls on SLV stock and converting this in to physical coins and hoarding – I bury mine in a secret place so my storage costs are zero. I expect that my call options will continue to expire worthless and I will continually bring in the premium for these options and convert into more coins. I expect that the price will continually erode from this with higher interest rates.
Oil supplies are increasing and this is pushing both oil and gas downward in order to lure in buyers. With higher interest rates – a continually increasing unemployment rate and lowering consumption levels, oil stocks will climb further, if but small amounts higher and higher.
However, other factors outside of mere supply and demand within an on-time economy are affecting the price of oil. Geopolitical concerns are pushing the price higher from time-to-time. As long as Middle East tensions remain elevated, the prospect of higher oil prices always loom. But, these factors are likely to abate at some point within perhaps a year’s time. Supply levels are going to have to drop.
I look for continued pressure downward.
US Dollar Index
The US Dollar Index has been clocked by the drop in interest rate yields. The differential in yield between the United States and other countries has narrowed. Because of this, the quants that play this game are being forced out. Cross currencies versus the US Dollar are moving up rapidly.
But, even this move downward will be short lived as interest rates stabilize after today’s sell off. The US Dollar Index will do the same and buyers will start to be drawn back in to the dollar.