Let’s talk about debt.  In 2018, the federal government spent $523,017,301,446.12 in interest (a 14% increase over 2017) on what is now over $22 trillion (a 7.5% increase over 2017) in debt.  The divergence between those two rates of increase is important.

The interest expense is growing faster than the amount of outstanding debt because interest rates have risen.  When I produced this chart in September, the average interest rate on government debt over the previous year was 2.378%.  In February 2019, it was 2.581%.

Although 10Y yields topped out last October as expected [see: Suddenly Interest Rates Matter], the average interest rate on outstanding debt has continued to increase. Combined with the fact that outstanding debt is accruing at over $1 trillion per year, this presents a very serious problem.

It also offers some very important clues as to what the Fed and other central banks will do over the coming year.

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It’s been a year since Trump tweeted those fateful words: “…trade wars are good, and easy to win.”The S&P 500 closed at 2691 that day.  While stocks have rallied marginally (0.3%) since then, not everything has gone according to plan.  In fact, just this morning we learned that our trade deficit has reached levels not seen since 2008.  It has grown by $119 billion since self-proclaimed Tariff Man took office.

Bloomberg reports that the Trump administration is pinning its hopes for the market on an announcement of an agreement with China — leading some to fear that whatever deal is struck will be one of political convenience rather than one that leads to real progress.

Trump’s economic team has told him an agreement will unleash a market rally, the people said. Advocates of a compromise with China have also told Trump it is crucial to cut a deal soon to reap the full boost ahead of the election because benefits such as more Chinese purchases of U.S. soybeans and other products will have a delayed impact and take time to reverberate through the economy, they said.

Stocks seem content to wait around, with the 10-DMA serving as a touchstone for the daily gyrations.  But, at some point, even algos can grow impatient.

Today could be that day, as COMP’s 20-DMA is due to reach its 200-DMA — clearing the way for long-overdue backtests for multiple indices.The bigger question, of course, is whether those backtests will hold.

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Just when I was about to lose faith in the ability of investors to recognize bad news when they saw it, something very rare happened yesterday.

VIX, which has been beaten down most every day since Mnuchin convened the Plunge Protection Team in December, suddenly popped up above its 200-DMA.The futures executed a 51-pt reversal before someone realized how ugly things were getting and pushed the EMERGENCY button.  ES climbed back above the SMA10 just before the close, and is back above it now.  But, it’s still well below our sell signal — the .786 Fib at 2812.13.

Incidents such as this accentuate the cracks in the technical picture which are becoming more and more apparent — even to the bulls.

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For those who enjoy chasing the market higher on rumors of an imminent breakthrough on the China trade deal (coincidentally released shortly before futures open every Sunday) today is your kind of day.

After retracing 78.6% of its late 2018 plunge last Monday, ES showed signs of a retreat.  But the latest news — this one planted with the WSJ — has put an end to that.  At what point will the algos ignore this ruse and pay attention to deteriorating data?

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The latest dismal economic news — which the market is ignoring in favor of unsubstantiated rumors of an imminent trade deal with China — is real personal spending which dropped 0.6% in December to a 10-year low.  So much for Mr. Kudlow’s retail sales “glitch.”

Futures, of course, are much more interested in the latest VIX decline and USDJPY rally.  continued for members… (more…)

As if yesterday’s Cohen and Powell testimony weren’t scintillating enough, the talks with North Korea broke down and a bevy of important economic data is due out this morning.  Will we finally see stocks take notice, or will VIX continue to keep the fireworks to a minimum?Advanced 4th quarter GDP is due out at 8:30 this morning.  Following disappointing retail sales and core capital goods data, few are expecting an improvement over Q3’s 3.4%. Consensus seems to be around 2.3%, though I’ve seen credible estimates at 2.1-2.2%.

A miss could compound things for equities, which are already struggling after news that Trump packed his bags and walked out on Kim Jong Un.

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Powell is likely to run into more aggressive testimony in his second day of congressional testimony.  Few House members rake in campaign contributions anywhere near as large as the average senator.

Markets are generally quiet, especially after all the intraday damage control seen yesterday.  If he should stumble, of course, there’s a lot of dead air below current levels.

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As Powell prepares for his Monetary Policy Report to Congress (10am, Watch Live), is he paying attention to the bond market?  Prodded by abysmal housing data… …ZN finally broke out.

According to Kudlow, last month’s retail sales miss was a glitch.  What about the 10.5% YoY drop in single family permits or the 15.9% plunge in multifamily permits?  How about wholesale inventories that expanded at twice the expected rate last month?

The bond market isn’t waiting for Powell to proclaim that the data has been anything but rosy lately.  With ZN breaking out, we can expect the next 4-6 weeks to be very interesting.

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It’s been two months since oil and gas reached our downside targets [see: Throwing the Game.]  Since then, WTI (CL) has bounced 36.4% and RBOB has bounced 30.6%.  CL has plowed through several upside targets since then, finally reaching our 57.48 target last Wednesday.  As we’ve discussed, it’s not just the chart patterns that suggested a reversal.  It’s also the economics of higher oil and gas prices which, as Trump reminded OPEC this morning, threaten the low-inflation narrative which makes a dovish Fed stance possible.

We’ll take a look at whether this top is likely to hold and what the implications might be for inflation and interest rates.

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