The Markets Are Intact For Now, But Deflation’s on the Rise

Just in the past week or so, chances of a Fed December rate hike went from a coin toss to over 80%! Last Monday, U.S. Treasury bond yields climbed to over 3.13% from just under 3% the Friday before! That’s a rise of over 4.5% in a couple days.

Stock prices have moved lower over the past couple days but are still stubbornly close to all-time highs.

The Dent Research investment committee (Harry, Rodney and the gang) met Thursday and we all arrived at the same conclusion: a lot of stocks within the major stock indices are getting creamed, but a few large glamor names are propping up the overall market. Some of those include Google, Netflix and Amazon.

So, lower earnings, revenues and outlooks are affecting individual stocks but not the overall markets… yet.

But as we’ve been writing about for months, the overall economy isn’t all that rosy.

Poor reported earnings over the last quarter is a direct reflection of a poor economy. If corporate earnings are lower, worker paychecks aren’t going up, price aren’t rising, and consumers are probably not spending more.

And guess what? Last month they didn’t spend as much as analysts expected. After no growth in September, October retail sales ended up only 0.1%. Excluding auto sales, they were up just 0.2%, well below estimates (though according to retailers, unseasonably warm weather was the culprit). Friday we saw more even evidence of our shaky situation as producer prices fell again. The October headline number was negative and down 1.6% for the year!

That’s deflation, folks!

If you exclude food and energy, we are up 0.1% in inflation for the year. That isn’t anywhere close to the 2% target the Fed is looking for and could change their mind about hiking, leaving investors even more confused.

Long-term Treasury bond rates did pull back Friday and yesterday after the above reports, along with another shaky manufacturing survey (Empire State). And to pile on more uncertainty, just add in the Paris terrorist attacks!

So at this point, there’s really no telling what the Fed will do next month. But as I’ve written before, it doesn’t really matter.

Here’s a look at the 30-year Treasury bond rate over the past 10 days:

30 Year US Treasury Bond 30 Days 11-17

As you can see, yields spiked after the jobs report and Fed speeches supported their mantra of a likely hike in December. Friday’s retail sales and producer prices report took some wind out of the Fed’s sails and were not supportive to a hike.

Since we broke out of the period of low volatility over a week ago, I see a good opportunity for a new position in Dent Digest Trader if yields pop a little higher. We could be helped by a surprise in any one of the important data releases this week. Good things come to those who are patient, or something like that!

Lance Gaitan
Editor, Dent Digest Trader

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Categories: Deflation

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.