The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Misbehavin’ bonds
July Advance Retail sales MoM (-0.6% vs 0.1% est & 0.2% prior) came in light. This economic weakness is cause for concern. Recession worries are still not merited but here’s another datapoint that tells the story of a softening economy. Treasury yields fell some on the release, which makes sense, but climbed thereafter, which is puzzling. Fed Funds futures price a FOMC hike in September at 32% now, continuing the downward trend. The S&P tried to rally early, opening up about 5 points but couldn’t fight the yield curve and went negative on the session before 10:30 AM. U Michigan sentiment, conditions, and expectations data released today at 10 AM, all surprising negatively, although all metrics still show economic growth. The weaker-but-still-growing economy narrative strengthened. And yet yields still climbed. Capital flow was extremely light at 73%. Investors were not very engaged today.
Just when I thought that the Treasury market had seen the light and was about to bring yields in, they go the other way. It’s one thing to randomly zig when one expects a zag but the data today was crystal clear. The economy isn’t as strong as we thought. That *usually* brings bond yields down. Not today.
I can’t explain why yields climbed. There are rumors that Japan is, and has been, selling large quantities of Treasuries. It is supposed that Japan is dumping Treasuries to defend the Yen. If today’s yield move is explained by Japan’s activity in the Treasury market, well, that’s comforting. It also makes Treasuries that much more attractive to buy. Maybe we’ll learn more next week. The point being that *maybe* we have a reason why yields didn’t do what they normally do. Or maybe we don’t and the bond market still fears inflation and the Fed for good reason.
Anyway, stocks fell small and if the S&P is still going to make a run higher, it’ll have to happen next week. The bulls were willing this morning, but their flesh was weak.
I think the bullish case for stocks remains very strong. If the yield curve needs to come in to kick stocks into upward motion, then we’re just stuck waiting for bonds to join the party.
I wonder what the Treasury market is seeking, in order to bring yields down?
Have a great weekend, see you Monday.
-Mike
Visdom Market Commentary
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