Our yield curve model is again sounding the alarm on overpriced equities. Unless the 10Y – which closed its June 8 gap this morning – declines sharply right away, the 2s10s spread signals a sharp equity downturn to finish the correction which began on Oct 12.
The bad news for equities? A sharp drop in the 10Y also portends a correction.
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Single-family home starts continued to gain from rock bottom interest rates and the exodus from urban, multifamily housing amid the pandemic. September residential starts grew 1.9%, while permits rose 5.2%, the fastest since the 2007 peak.
Single-family inventory dipped to 3.3 months, the smallest since 1963, while multifamily starts cratered by 16.3%.
It was a bright spot of economic news following an ugly day of losses across all indices yesterday that saw ES tumble to our next downside target.
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Futures are higher ahead of the open on a slight increase in interest rates and the usual algo-baiting such as USDJPY’s latest bounce.
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September retail sales sharply beat estimates, coming in at +1.9% versus 0.8% expected. With enhanced unemployment and virtually all other stimulus having dried up, however, this could be retail’s last hurrah.
But, it’s enough to boost stock prices on this OPEX Friday 2 1/2 weeks before a presidential election.
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Futures tagged our initial downside target overnight as markets are once again reminded that the pandemic is far from over.
The shutdown headlines out of Europe won’t surprise anyone who has been watching the COVID-19 numbers.
The US, which was considerably less successful in suppressing cases following the initial or second surge, is on the same path – but from a much higher base.
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CPI rose 0.2% MoM in September, half the August rate. It rose 1.4% YoY, slightly higher than September’s 1.3%. Without the outsized gains in used cars and the minor gains in energy (conflicting with the official EIA data), MoM CPI would likely have been negative.
This is hardly supportive of the reflation narrative driving equity prices lately. This should be the last straw for the 10Y’s bounce, with the resulting breakdown a significant headwind for stocks.
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More gimmicks, higher highs. It’s getting to be an old story. But, as long as voters and algos don’t know or care, it will continue.
Futures were in danger of giving up Tuesday’s 3421.75 highs when VIX suddenly collapsed by 7% in a matter of seconds.
When that didn’t immediately result in a sufficient boost, it happened again, this time around the jobless claims miss at 8:32 and yet again at 9:02 (by 9.8%) for good measure.
Higher highs, no problem.
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The trade deal: the gift that keeps on giving.
The August trade deficit came in at $67.1 billion, the largest since 2006 – partly a reflection of the pandemic but exacerbated by a 9.3% collapse in the value of the DXY since its March highs.
At the same time, oil and gas prices have spiked sharply higher since reaching our downside targets on Oct 2. So, bond traders can be forgiven for bidding up the 10Y to nearly 0.80%.
If the past is any indication, DXY has much further to go and trade deficits will continue to rise – hardly the outcome the White House promised amid the destructive trade talks in 2018. Remember when the market rallied on every rumored breakthrough?
No worries, though, as VIX “coincidentally” collapsed by 10% in a matter of seconds, thus preserving a positive open.
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It’s not Trump, it’s the algos. While the mainstream media focuses on rumors regarding Trump’s return to office, the algos are zeroed in on VIX’s latest failure push above its 200-DMA.
This is a kitchen sink moment. Oil and gas are pitching in, with 4.5% and 5.5% pops respectively in the pre-market. And, even USDJPY is threatening a bullish 10/20 cross.
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