Despite massive money-printing efforts, Japan’s economy contracted last quarter. Following suit, Germany’s economy also contracted despite heavy support from the European Central Bank. This is further evidence that central banks cannot “print” their way out of weak economic growth.
Stocks started their day higher after the latest Consumer Price Index data was released that showed consumer prices are rising at +2.5% YoY, which is faster than wages are increasing. Stripping out energy and food, Core CPI showed a strong increase in prices at +2.1%. This is more evidence that the Fed will raise the Federal Funds rate at next month’s FOMC meeting.
Shortly after stocks began their day higher and bonds began their day lower, the quant computer programs started another round of deleveraging which sent all of the major indices into the red. Treasury yields fell alongside stocks. With wage-growth not keeping pace with consumer prices, the demand for loans is falling, which should bring yields down.
After yesterday’s rout in crude oil, news broke this morning that the quant computers were responsible for the big drop as their algorithms caused them to sell. Due to the large drop, investment banks were forced to cover their longs by also shorting oil. Crude was up in early trading but is struggling to hold on to its gains. Tonight’s API crude inventory report could send oil prices further down if it shows a higher-than-expected build.
The API report showed a massive +8.79 million crude inventory build. Tomorrow’s EIA report is the official government data, which will be eagerly watched. Oil traded back down to $56 per barrel after the report.
All major stock indices were down and the DJIA joined the others by closing under its 200-day moving average. Much of today’s selling can be attributed to the quant computers selling.
Treasury yields moved lower on the day across the board. Ten-year Treasuries bounced off a resistance level at 3.095%, but should that fail to hold, yields will quickly head to 3.00%.
Physical gold popped higher along with the gold miners, but it’s still too early to make a call to buy in. Sellers have been aggressive and are not exhausted yet.
Agricultural commodities held their support from yesterday as buyers moved prices higher. Commercial hedgers are long commodities, so as the short-sellers exhaust themselves, prices should move higher.
Fed Chairman Jerome Powell speaks today at 3 pm PST. Everyone will be looking for clues to what his intentions will be at the next Fed meeting in December. Many are hoping he turns dovish as the stock market has dropped, but the economic data suggests the Fed will continue to hike.