Market Brief – Thursday 7/11/19

Stock investors hoping for a weak Consumer Price Index print for June to justify the Fed lowering interest rates at their July 31st were disappointed as consumer prices fell slightly on an annualized basis. Gold investors hoping for a strong Consumer Price Index print were also disappointed and as expected, gold quickly gave back some of its overnight gains.

On an annualized basis, the Consumer Price Index for June fell to +1.6%, which is below the Fed’s two-percent target, but Core CPI, which includes food and energy, increased to +2.1% on an annualized basis. The annualized rate of change of Core CPI has been in the +2.0% to +2.2% range for nearly twelve months.

FOMC Chairman Powell is starting to sound desperate to ease financial conditions despite financial conditions being extremely easy. Falling Treasury yields are an indication of tightening financial conditions, which has Powell worried. In a couple of weeks, investors will find out of the Fed is truly data dependent and willing to hold rates or if the Fed will bow to political pressures and cut.

Today’s $16 billion 30-year Treasury bond auction saw weak foreign demand as foreign bidders took a mere 50% of the auction. Domestic bidders took 16.8% of the auction, which left securities dealers with 33.2%. Treasury yields rose following the auction on heavy volume into a previously established price level of strong buying. Weak foreign demand pulls liquidity out of the U.S. stock market as securities dealers are forced into taking the remaining supply, which leaves less money to invest in stocks.

The USDA released their World Agriculture Supply and Demands Estimates (WASDE) for June which they said would fix many of the problems from the last report. The WASDE report is showing an abundance of crops, but experts quickly weighed in on the report stating nobody knows what the planted acres are, the harvest acres are, what the yield is going to be, what production will be or what demand will be. In other words, experts are saying the report has no real value. Agricultural commodities traded higher following the report.

Some of the major stock indices closed higher while others closed lower today as the broad market digested a weak 30-year Treasury auction. While foreigners stepped back from supporting the U.S. government, investors bought Treasury bonds right at a previously established price level. The bond market may be volatile, but the long-term trend is still biased towards lower bond yields.

Physical gold closed lower along with the mining stocks as the Consumer Price Index didn’t reflect runaway inflation that gold bulls were hoping it would. There are several major moving averages sitting below, meaning a pullback from golds current price level could confirm the early stages of a bull market in gold.

I inaccurately reported that the recent acceleration in the M2 Money Supply was due to large investors raising cash. As it turns out, the U.S. Treasury has been drawing down its reserves as the debt ceiling looms. Should Congress increase the debt ceiling, the M2 Money Supply should resume its deceleration. The annualized rate of growth in the M2 Money Supply increased last week to +4.84%. The 6- and 3-month growth rates also increased to +2.86% and +2.26% respectively.

The answer to yesterday’s question is that consumer prices are more closely aligned to 10-year Treasury yields than they are crude oil prices or the Money Multiplier. Should the relationship between consumer prices and Treasury yields continue, the growth rate in consumer prices is likely to slow.