Stocks were blindsided on Thursday by a very strong ADP weekly employment number that more than doubled estimated. The Fed has been waiting for the labor market to weaken so they can stop raising interest rates and this was anything but weak. Perhaps it was a one off report, but investors went scrambling just in case. We'll get the June jobs report this morning and yesterday's data suggests that this number could be hot as well, but you never know as these reports seem to be unpredictable. Maybe the monthly data will save the day as we have seen some suspicious jobs reports and revisions over the years.
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You can see the damage done to the indices and the stock funds above, but those charts do show that there was buying off the morning lows. It's a little tough to call it a positive reversal day because of the losses, but someone was doing a lot of buying after the initial drop.
We saw a spike in all Treasury Yields due to that stronger than expected weekly employment data. That sent the chances of a 0.25% Interest Rate hike to over 90% for the meeting later this month. And, after just just a 6% chance of another rate hike at the November 1st meeting a few weeks ago, the new probability is up to a 39% chance. This is a lot of rate hikes over the last year or so, and it is debatable whether the market has priced all of that in, or if the prior rate hikes has had its impact on the economy yet.
It hasn't been a surprise that rates have been going up because the economic data has been better than expected recently, but the market had been rallying in the anticipation that the Fed was ready to pause the rate hikes, and clearly that isn't going to be the case at least until closer to the end of the year.
The 10-year Treasury Yield is back over 4%, and the 2-year closed at 5%, which steepened a bit yesterday but remains basically as inverted as it has been in a long time and historically suggests an eventual recession.
This list of current bond yields just isn't normal where, not only is the 2 year paying 1% more than the 10-year Treasury, but all them, including the very short-term 1-month, 3-month, and 6-months bonds are paying more than a 30-year yield (annualized.) Crazy! How can things move along as if nothing is wrong?
As we have said a million times, the stock market can move in one direction or the other a lot longer than seems reasonable, and while the S&P 500 is still well off the early 2022 highs, it has come a long way off the October lows despite the crazy numbers we see in the bond market.
I won't pretend that I know what it all means and how it will play out, because the market could rally for months for all we know, but like a car that is running despite leaking fluids and sounding very funny, you know something is wrong and it's just a matter of time before it conks out.
Here's that chart of the 10-year yield that recently broke through the top of a bull flag, which generally means higher yields to come. I admit that I was fooled by this because I thought the interest rate hikes would hurt the economy and send yields lower, so I expected the top of that flag to hold, but clearly it did not so my recent bond (F-fund) trade was a dud.
The good news here is that the economy has surprised many of us with better than expected growth. On the other hand it likely means higher interest rates down the road. For us, one thing it does mean is that the safety of the G-fund is getting a little more interesting with interest rates rising and it is currently paying a rate of 4.0% annually, if not higher by the end of the month. In 2020 it paid just 0.97%.
We will get the June Jobs Report this morning (Friday) and estimates are looking for a gain of about 220,000 jobs and an unemployment rate of 3.6%. Yesterday's ADP report reminds us that estimates are not always accurate so hold on.
We will also get a CPI report next week, which may be even more important at this point.
The S&P 500 (C-fund) gapped lower, filled in last week's open gap (blue) and actually closed pretty strongly considering the losses. There's a lot of support in the 4350 area but can we continue to see pushes toward the recent highs with the 10-year yield over 4% and a Fed who really wants to push those rates higher to slow down the economy?
DWCPF (S-fund) got slammed but it also erased a big portion of yesterday's losses by the close. That could be the knee-jerk reaction of program trading which is in buy the dips mode, but that could change if we don't see some upside follow-through in the coming trading days. There's a big open gap overhead that could be filled with a "good" jobs report this morning, but for now we seem to be in a double top pullback, however long that is going to last.
EFA (I-fund) was the big loser yesterday with a big gap down here as well. There's always gaps all over this chart so which way it goes first is anyone's guess. The one thing I notice here is that it may be putting in a lower high, which could lead to a lower low below 69.
BND (bonds / F-fund) tried to warn me with that bear flag clearly forming, but with the threat of a recession brewing, I was not expecting yields to jump back over 4% and 5% on the 10 and 2 year Treasuries, respectively. Why the jobs market is relentlessly strong despite the roadblocks is a head scratcher. That open gap near 71.25 has been open for a long time and it nearly filled it yesterday.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks so much for reading! Have a great weekend!
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
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You can see the damage done to the indices and the stock funds above, but those charts do show that there was buying off the morning lows. It's a little tough to call it a positive reversal day because of the losses, but someone was doing a lot of buying after the initial drop.
We saw a spike in all Treasury Yields due to that stronger than expected weekly employment data. That sent the chances of a 0.25% Interest Rate hike to over 90% for the meeting later this month. And, after just just a 6% chance of another rate hike at the November 1st meeting a few weeks ago, the new probability is up to a 39% chance. This is a lot of rate hikes over the last year or so, and it is debatable whether the market has priced all of that in, or if the prior rate hikes has had its impact on the economy yet.
It hasn't been a surprise that rates have been going up because the economic data has been better than expected recently, but the market had been rallying in the anticipation that the Fed was ready to pause the rate hikes, and clearly that isn't going to be the case at least until closer to the end of the year.
The 10-year Treasury Yield is back over 4%, and the 2-year closed at 5%, which steepened a bit yesterday but remains basically as inverted as it has been in a long time and historically suggests an eventual recession.
This list of current bond yields just isn't normal where, not only is the 2 year paying 1% more than the 10-year Treasury, but all them, including the very short-term 1-month, 3-month, and 6-months bonds are paying more than a 30-year yield (annualized.) Crazy! How can things move along as if nothing is wrong?
As we have said a million times, the stock market can move in one direction or the other a lot longer than seems reasonable, and while the S&P 500 is still well off the early 2022 highs, it has come a long way off the October lows despite the crazy numbers we see in the bond market.
I won't pretend that I know what it all means and how it will play out, because the market could rally for months for all we know, but like a car that is running despite leaking fluids and sounding very funny, you know something is wrong and it's just a matter of time before it conks out.
Here's that chart of the 10-year yield that recently broke through the top of a bull flag, which generally means higher yields to come. I admit that I was fooled by this because I thought the interest rate hikes would hurt the economy and send yields lower, so I expected the top of that flag to hold, but clearly it did not so my recent bond (F-fund) trade was a dud.
The good news here is that the economy has surprised many of us with better than expected growth. On the other hand it likely means higher interest rates down the road. For us, one thing it does mean is that the safety of the G-fund is getting a little more interesting with interest rates rising and it is currently paying a rate of 4.0% annually, if not higher by the end of the month. In 2020 it paid just 0.97%.
We will get the June Jobs Report this morning (Friday) and estimates are looking for a gain of about 220,000 jobs and an unemployment rate of 3.6%. Yesterday's ADP report reminds us that estimates are not always accurate so hold on.
We will also get a CPI report next week, which may be even more important at this point.
The S&P 500 (C-fund) gapped lower, filled in last week's open gap (blue) and actually closed pretty strongly considering the losses. There's a lot of support in the 4350 area but can we continue to see pushes toward the recent highs with the 10-year yield over 4% and a Fed who really wants to push those rates higher to slow down the economy?
DWCPF (S-fund) got slammed but it also erased a big portion of yesterday's losses by the close. That could be the knee-jerk reaction of program trading which is in buy the dips mode, but that could change if we don't see some upside follow-through in the coming trading days. There's a big open gap overhead that could be filled with a "good" jobs report this morning, but for now we seem to be in a double top pullback, however long that is going to last.
EFA (I-fund) was the big loser yesterday with a big gap down here as well. There's always gaps all over this chart so which way it goes first is anyone's guess. The one thing I notice here is that it may be putting in a lower high, which could lead to a lower low below 69.
BND (bonds / F-fund) tried to warn me with that bear flag clearly forming, but with the threat of a recession brewing, I was not expecting yields to jump back over 4% and 5% on the 10 and 2 year Treasuries, respectively. Why the jobs market is relentlessly strong despite the roadblocks is a head scratcher. That open gap near 71.25 has been open for a long time and it nearly filled it yesterday.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks so much for reading! Have a great weekend!
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
