What lies below the surface

What lies below the surface.  Markets relented some of their recent gains in yesterday’s session on, you guessed it, ongoing trade fears. Interestingly, the $200 billion tariff proposal announced yesterday, which is credited with the market’s decline, was actually really set in play weeks ago.  That said, yesterday’s move really underscores the underlying uncertainty that has existed, still exists, and will continue to exist.  The challenge is trying to determine when that “uncertainly” will effect the markets as it tends to ebb and flow almost daily.  It ebbed on Monday and Tuesday, it flowed yesterday, and it is looking like it will ebb once again in today’s session.  I sometimes interchange the word investor and trader indiscriminately but here today I would like to make it clear when I am referring to ups one day and downs the next, I am speaking of the game of traders.  What I try to focus on in these notes are investors, whose goals are to seek capital appreciation, income, and risk aversion on a more long term basis.  in doing so, it is important to unpack the daily ups and downs in an attempt to discover bits of information that we can use in our longer term view.  For example, I often lament over the trade war and its potential impact on global GDP, inflation, rates, commodity prices, and so on. These are the real drivers that impact a longer term investor’s comfort and success.  Will a trade war impact these factors in the quarters to come? Absolutely!  Can the actions of the Federal Reserve affect these as well?  Absolutely!  Why am I bringing these up and drawing the line between investors and traders?  During these exciting and volatile markets it is absolutely critical for us to focus on the mid and long term and try hard not to get tempted by the daily ups and downs.  We are investors (if you are a trader, call me because I have some interesting charts for you as well).  So let’s start with some investor information today.

Yesterday morning as equity traders sold off on trade fears, the producer price index was released showing an increase of +3.4% year over year, greater than the expected +3.1%.  This is noteworthy because the PPI is an indicator of what producers are paying for their production, making it a leading indicator of inflation.  Remember, rational companies will raise their prices to consumers to protect margins as their costs rise.  What affects the PPI?  Labor costs and lots of things that are now going to cost producers more due to tariffs.  The Fed’s job is to keep inflation under control and they do so by raising short term rates, amongst other things.  Investors in the bond market buy longer maturity securities if they feel that the economy will be under pressure in the future.  This is precisely what happened yesterday in response to the PPI number.  Short maturity treasuries went down pushing yields up on the front end of the yield curve while longer maturity treasuries traded up pushing yields on the back end of the curve down.  This is curve flattening, another one of my favorite touch points.  The yield curve as depicted by the 2 year / 10 year swap spread closed at a low yesterday (see chart 18 in my chartbook).  On that chart you will also note that the yield curve also flattened and began to invert in the months prior to the last recession.  This morning as global equities look to open  positively with an “ebb”, the yield curve will start the session flatter than yesterday’s close at 26.57 basis points.  We will be getting the CPI this morning and it is expected to show that prices to consumers rose by +2.9% year over year and +2.3% ex food and energy.  While the Fed watches the PCE number for its consumer inflation number, the CPI will serve to influence trade in treasuries through today’s session.  Finally in equity markets, though they had a rough session yesterday, all managed to close at technical levels that did not materially change their short term outlooks.  The S&P 500, the Russell 2000, and NASDAQ 100 remain constructive while the Dow Jones Industrial average is still in neutral territory (see charts 4,6,7, and 8 in my chartbook).  Crude oil took a significant hit yesterday as rumors of supply increases from Libya hit the tape combined with the cliched trade fears that were present yesterday.  Crude will got some support at its 69.72 Fibonacci line and still remains constructive.  Gold, along with other commodities in the metal complex, continues to fall under pressure from dollar strength and fears of a global GDP growth slowdown resulting from… can you guess it by now… trade fears (see charts 12 and 13 in my chartbook).  So we start today’s session looking for a smooth sail but we must keep a weather eye on the horizon, and more importantly, what lurks beneath the surface.  Please call me if you have any questions.

daily chartbook 2018-07-12

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Muriel Siebert & Co., LLC is an affiliated broker/dealer of the public holding company, Siebert Financial Corporation, which also owns Siebert AdvisorNXT, LLC. Siebert AdvisorNXT, LLC is a registered investments advisor (RIA) with the SEC and with state securities regulators. We may only transact business or render personal investment advice in states where we are registered, filed notice or otherwise excluded or exempted from registration requirements. Investment Advisor products are NOT insured by the FDIC, SIPC any federal government agency or Siebert’s parent company or affiliates.

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