Markets are higher this morning as yesterday’s rally held and was followed throughout the world. Bonds and MBS are down.
Second quarter GDP was revised upward to 3.7%, a strong reading. Consumption rose 3.1%, and the core personal consumption expenditure inflation index rose 1.8%. After seeing these numbers, it is easy to see why the Fed was looking to hike rates in September. That was before the global financial market sell-off. The September jobs report next week will be huge.
Initial Jobless Claims fell slightly to 271k, as we sit at more or less record lows.
The Bloomberg Consumer Comfort Index rose to 42 from 41.1 last week. Roughly 1/3 feel positive about the economy, while 54% feel positive about their personal finances.
The sell-off in stocks has been dramatic – in fact the last time we saw this big of a downward move over several days was 1940. The more interesting market has been bonds, which have barely benefited from the big drop downward, and gave up all of those gains almost immediately. The US dollar has been getting whacked during this sell-off as well, which means foreign money is dumping Treasuries. It probably is the petro-economy states doing it, however I have been hearing rumblings of Chinese selling. Whether this is a new dynamic in the market or not remains to be seen, however the action in the 10-year feels like the path of least resistance is now down in price / up in yield.
The Washington Post has another article talking about how stocks are “rigged” based on trading on Monday. Yes, stocks were all over the place, however the structure of the market has fundamentally changed as a result of technology and regulation. There used to be professional market makers for NASDAQ stocks and the specialist on the floor of the NYSE that would be the buyer when everyone else is selling. On days like Monday, they would lose money, but make up for it in normal trading, by selling a stock 1/8 or 1/16 above where they were willing to buy it. Nowadays, with sub-penny spreads, the market maker will never make back losses on days like Monday, so they no longer do it. The only ones left are the high frequency traders, who may or may not be liquidity providers. Stocks aren’t “rigged” – investors are getting what they pay for.
Ray Dalio (of Bridgewater) explains why the Fed may hike rates a quarter of a point or so before launching QE4. His point is that there are two cycles to pay attention to: the first, which is the shorter term cyclical economy that lasts a decade or so versus the long-term cycle, which lasts closer to a century. He is making the argument that the Fed is probably going to do another big easing before the big tightening. This tightening might be 25 or 50 basis points, which he doesn’t consider a major tightening. The Fed is focused on the classic recession – expansion phase which began in 2005 and is more or less where we are today. Dalio believes we are at the end of a debt supercycle, and the last time we went through a debt supercycle deleveraging period was in the 1930s. And while US corporations (and households to a large extent) have gone through a major deleveraging, the rest of the world has not – especially China, which is just entering their deleveraging phase. Interestingly, these supercycles are not new – even the Bible refers to them as 50 year cycles followed by a massive forgiveness (called jubilees, even though they aren’t all that much fun).
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