About That Rate Spike – Then

Macro Matters

Trade Tariffs will lead headlines, as they have for awhile now, although the US equities markets seem numb to them. Headlines of trade talks – on again and off again – are like the ubiquitous trial balloons that the white house keeps sending out to test the temperature of the market. And it is running more hot then cold given that we are at all time highs. More likely Trump drags this out in order to help the GOP get through Mid-term elections and then he meets with President XI a the G20 meeting in late November.

However, we haven’t really gotten high enough in the 10-year yield to test buyers of equities well enough. Higher interest rates are my main preoccupation for weeks now, as they portend much larger headwind for equities and as such should trigger some selling soon. TNX is breaking out and I suspect it will continue toward major quarterly resistance at 3.3% this year.

Cam Hui, Humble Student of the Markets, does such a great newsletter that I often see entire paragraphs I want to lift so I did.

I would not stay on the bullish bandwagon for too long. The FOMC meeting is scheduled for the following week. While a September raise is already baked-in, the market will be looking for hints of when the Fed might pause its pace of rate hikes. I don`t believe that the market has sufficiently discounted the hawkish tone from the likes of Powell, Williams, and Brainard. Their message is very clear. The Fed will keep raising rates until the economy shows signs of slowing.

In fact, Cam does a nice job with his 10 or more technical reasons to be cautious on stocks

“The Fed remains behind the curve, and needs to hike rates fast because the biggest risk for the US economy is not interest rates, but the chain of bubbles and excess risk built in financial markets.”  Jackson Hole and the Risk of Inaction

Why Interest Rates Keep Spiking

In early September, Manufacturing jumped to a 14-year high of 61.3 in August from 58.1 in July.  Economists had forecast 57.9; any reading of 50 indicates expansion.   Meanwhile ISM Services rose to 58.5 from 55.7 in the previous month – another strong reading.

Then August’s employment data came in at 201,000 jobs gained, and a 3.9% unemployment rate.   The yearly rate of pay increases climbed to 2.9% from 2.7%, marking the highest level since June 2009. The print for September is expected to be 230,000! Another words, economy is ‘too strong’ for ‘too low’ rates.

Even overseas caught the mood when Japan’s Q2 GDP growth was reported as the fastest since early 2016, hitting an annualized rate of 3% compared to the initial reading of 1.9%. The rate was impacted by a tightening labor market fueling automation and amid the escalating US-China trade war. Capital expenditure was a driver, revised to a 3.1% growth on the quarter from 1.3%, the fastest growth in 11 years.

My Point: Why would the Fed not raise rates?

And then, my point I wrote about in Seeking Alpha was, “the time to worry about the Yield Curve is when they stop raising rates”. 

Need More Evidence?

Just over a year ago, hedge funds were betting on the biggest curve flattening position in a decade. They were right.

Note to Subscribers in August: You know my sentiment: we’re going to have more rate hikes and we’re going to have economic data and trade war currency manipulation to cause rates to spike so TLT and EEM and GLD/GDX are at risk for more downside.

And oh boy, have you seen TLT lately? This is why I recommended to Short TLT at $122 and go long TBT at $35.60: