Market Brief – Wednesday 10/3/18

The ISM factory survey data for September showed an increase in hiring and demand from the services sector. What is interesting is this demand hasn’t been showing up in the retail sales data, but it has shown up in the wholesale inventory data, which has been recently rising. Businesses are expanding their hiring for the holiday season in an extremely tight labor market.

Wages haven’t increased to bring people who have retired back into the workforce. Most of the jobs being created are minimum wage, low productivity jobs, which is causing employers to raise wages to pull employees from other companies.

The September ADP jobs data showed a whopping +230,000 jobs created. Those who follow the Phillips Curve, which suggests inflation is inversely correlated to job growth, saw this as a renewed reason to short U.S. Treasuries. Too bad there is no evidence that inflation is tied to the number of employed.

With the Fed tightening, short-term yields are rapidly rising faster than long-term yields, which leads to an inverted yield curve. An inverted yield curve causes banks to tighten lending standards and reduce lending. When the growth money-generators of our economy slow, so does inflation.

What I find interesting is that 10-year Treasury yields are 0.51% higher than their recent peak with the largest speculative short position in the history of the Treasury market. The word on the street is the reason U.S. yields are rising is due to the high dollar-hedging costs foreign investors have to pay to buy U.S. debt.

Many believe both stocks and yields can continue rising. By design of our monetary system, stocks and yields can rise during periods where the money supply is growing. Our money supply has been decelerating for the past two years and is going to continue decelerating as the Fed continues to tighten. Stocks and yields can’t continue rising together. One can, but not both. At some point, both will fall.

Stocks closed the day slightly higher after late day selling. Treasury yields pulled back from their highs as buyers came in during late trading. Physical gold was rejected at its 50-day moving average, as were the large gold miners. After yesterday’s big jump, agricultural commodities gave back some of their gains to close just below their 50-day moving average.