The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Big catalyst
Around 8:30 AM, the Treasury Secretary Scott Bessent announced that the Treasury would double, at least, its buybacks of Treasury bonds in the 10-30 year maturity range, beginning September 9th. Bonds rallied like crazy and stock market futures did the same. The Dollar weakened and precious metals ramped. The equity bulls got their wish for lower yields across the curve. The S&P did not rocket higher although it did rally. The index opened about +30 points and wandered around that level for the remainder of the day. Capital flow almost returned to normal today, hitting 97%.
The Treasury announcement just marked a top in yields, especially on the long end, for US Treasuries. The question is whether this is a short-term top, or whether it is a longer one. Buried within that question is whether the market believes that the Treasury can hold the line is just set.
If inflation continues to drop and the economy continues to cool, the market will come around the to idea that the climbing rates it set in motion lately, was based on misplaced fears and projections. No big deal. Markets mis-forecast sometimes and they adjust when they adjust. In this case, the Treasury Department would have indicated the turning point.
However if inflation rises and/or the economy revs up… then the markets will come around to the idea that the Treasury was *wrong* and/or was attempting to manipulate the market. This will be a big deal and will be very bad for capital markets for a while. Yields will not only climb again, but the market will pick a fight with the Treasury if Treasury reasserts itself. Things will go badly as a result.
Other markets will get caught up in the crossfire too. Equities will suffer significantly.
It will take a Volcker-like action from the Fed to restore inflation-fighting credibility to the government. Only after that painful exercise, will things go back to normal. Picking up the pieces after that denouement will be lucrative for the coming years but getting there will be horrible.
Whether we realize it or not, the stakes in the Treasury market just increased. This means the stakes in all markets have also increased.
The inflation issue is key but issuance may also be something lurking.
If issuance is something very important to the market, that would be a very big deal… and would likely require a market conniption before Congress and the President would address it. That would be a bear market catalyst at best, a crash at worst.
Let’s assume that inflation is the main issue for the sake of our mental health.
Inflation data needs to come in cool. If it does not, the Fed must hike. Even if it comes in cool, the Fed must talk hawkishly and squash any worries about inflation.
The Fed Funds futures market prices a September hike at 33%. Expect that number to jump, and other markets to react, if inflation data spooks markets between now and Sep 16.
See you tomorrow.
-Mike
Visdom Market Commentary
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