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Hi. Peter Navarro here with the economy and market rap for the week ending October 13, 2023; and this was one of the strangest weeks I’ve seen in the stock and bond markets in a very long time.
Recall from last week’s missive, I noted a strong bullish reversal in the S&P 500 at the end of the week. After eight weeks of (correctly) calling a bearish downward trend, this reversal warned me off of any notion of shorting the market and reinforced a pure cash call.
Absent further news, I fully expected this week to be in the green for the bulls anticipating a continued downward trend in inflation, no Fed rate hike in November, a continued strong jobs market, and an above trend 3rd quarter GDP growth rate that would augur well for corporate earnings.
Over the weekend, however, the Hamas hit the fan in Israel with the most brutal forms of atrocities. This has triggered all-out war in the Gaza Strip, the specter of another Arab oil embargo, a further drain on both the US arsenal and budget because of anticipated aid, and yet another refugee crisis.
In the meantime, both the Producer Price Index and Consumer Price Index came out hot enough to suggest that the hoped for downward trend in inflation is unlikely to be sustainable; and that is exactly what the long bond – the ten-year Treasury – is telling us as it continues to firm upwards in yield while further depressing bond prices.
As for the actual data, the PPI ticked up by 0.5% in just one month for the third time in a row while the price at the pump went up by a whopping 5.4%. Strip out the unpredictable food and energy sectors, and the PPI still went up by 0.3%.
On the CPI front, consumer prices in the U.S. nudged up by 0.4% in September, a bit cooler than August’s 0.6% but still hotter than predicted. Year over year, inflation stuck to a 3.7% rate, defying expectations of cooling down to 3.6%.
Digging deeper, excluding food and energy, inflation still hiked up by 0.3% for the second month running. Over a year, this “core” inflation measure did slow down a touch, from 4.3% to 4.1%, as expected.
So what’s driving up consumer prices? Shelter costs are the big culprit, rising by 0.6% and making up more than half of the total increase. Gasoline’s another biggie, with prices revving up by 3%. Overall, the energy index rose by 1.5%, while food costs inched up by 0.2% for the third month in a row. Also on the rise were the costs for rent, motor vehicles, and recreation. Hotel and motel prices likewise leaped by 3.7% but at least used cars got a bit cheaper.
The biggest thing that caught my eye reading between the lines was the fact that the Treasury Department went out this week with a big auction for 30-year bonds, there were few takers, and the bond dealers caught with inventory managed to sustain losses from the lack of demand, the fall in price, and rise in yield from the when-issued price. In lay terms, if Treasury can’t sell its bonds at the posted yield, it’s going to have to offer higher yields and that means the long end of the bond curve is telling us we can expect a long term inflation – yes, it’s all about the long bond now.
My bottom line for the week? What we are witnessing over the last week is a classic stalemate between the bulls and bears on Wall Street; and there are just simply too many bullish and bearish forces to glean any kind of net market effect. That’s why cash earning a nice 5% return in short term instruments is such an attractive option.
That said, I also now think once again it’s more risky to be long than short and if I had to speculate on a direction, I’d be short via a leveraged instrument for the S&P 500 like SPXU. But that is a very close call only for those not feint of heart. Remember: I’m not giving advice here, just sharing how I think about the markets.
Let’s close with this last observation:
The House Speaker’s race is both a shambles and quite revelatory of the large RINO pockets within the Republican House majority who hate us folks in MAGA and are much more comfortable giving Wall Street, Big Pharma, and the defense industry what it wants than balancing our budget. All signs here point to a Republican capitulation that will kick the debt limit can down the road another six months and thereby take off the table and government closure. Never mind the fiscal cliff these fools are driving us over.
The only good news about this shambles is that it is flushing out the RINOs that need to be primary’ed. Bannon’s War Room is all over that, and so should we be.
Peter Navarro. Out.
If you haven’t yet!
A Bull-Bear Stalemate and It’s All About the Long Bond Now