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TSX gains 181 points as gold rises 2%, loonie up

Canada s TSX Composite Index posted another day of gains as it rose almost 0 9 per cent or 181 35 points Wednesday October 13 The last time the index…

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Canada’s TSX Composite Index posted another day of gains as it rose almost 0.9 per cent or 181.35 points Wednesday, October 13. The last time the index saw a red day was on October 4 and this streak has landed it at 20,618.47 points, the highest it's been since September 15.

In a reversal of sorts in recent trends, the energy and financial sectors were down while all other sectors including healthcare and technology were in the green. The base metals sector, building on yesterday’s gains, was up almost 1.4 per cent and some analysts believe hefty inflation in the US might be the suspect for this. Industrials was up 1.3 per cent and tech was up nearly 2.3 per cent.

One-year price chart (October 13). Analysis by Kalkine Group

Volume active

The Toronto-Dominion Bank was the most actively traded stock with 15 million shares exchanging hands. It was followed by Denison Mines Corp where nearly 9.2 million shares exchanged hands, and B2Gold Corp with eight million shares exchanging hands.

Movers and laggards

Wall Street update

Speaking of inflation, the Labor Department said the consumer price index saw a 5.4 per cent increase in September year-on-year and disrupted supply chains could very well have exasperated the situation.

Though the major indices fell on market open Wednesday, they soon began to rally and for the most part, recovered.

The Dow Jones Industrial Average dropped a negligible 0.53 points to 34,377.81 points, and the S&P 500 gained 13.15 points or 0.3 per cent up to 4,363.80 points, and the Nasdaq was up 105.71 points or 0.73 per cent to 14,571.64 points.

Commodity update

It is no surprise that gold, considered to be a hedge against inflation, saw a spike of over two per cent (bear in mind the US dollar was down too) and traded at US$ 1,794.70. Brent oil was down 0.29 per cent to US$ 83.18/bbl, while crude oil fell 0.25 per cent to US$ 80.44/bbl.

Currency news

The Canadian dollar stood better against the US dollar on October 13, while USD/CAD ended in the red at 1.2438, down 0.21 per cent.

The US Dollar Index was worse off against the basket of major currencies Wednesday and ended at 94.02, down 0.53 per cent.

Money market

The U.S. 10-year bond yield fell 1.55 per cent on Wednesday’s trade and ended at 1.547.

The Canada 10-year bond yield fell 1.2 per cent on October 13 and ended at 1.607.

Economics

Ignore the Media – Inflation Isn’t Heating Up, It’s Cooling Off

If you follow financial media closely, you’d think that inflation is running hot as ever in the economy right now – but you’d be wrong. As a result,…

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If you follow financial media closely, you’d think that inflation is running hot as ever in the economy right now – but you’d be wrong. As a result, you’d miss out on the biggest wealth-creating force in the history of financial markets.

Source: SERSOLL / Shutterstock.com

Seriously.

Now, I can’t fully blame the news outlets for missing the story here.

After all, the September Consumer Price Index (CPI) print did come in yesterday with red-hot headline numbers. Consumer prices rose 5.4% year-over-year and 0.4% month-over-month – both above expectations and both huge numbers. News outlets took those numbers and ran with them, publishing a plethora of articles about how inflation in the U.S. economy is hotter than ever.

I’m sure you read a few of those articles…

But here’s the thing: Inflation is cooling off, not heating up.

Why the Media Is Wrong About Inflation

Go look at the bond market. When inflation expectations rise, yields rise. But yesterday, after the CPI print hit the tape, yields plunged. They fell as much as 3 basis points to multi-day lows after the CPI print.

Why? Because the number that actually matters – core CPI, or core inflation less food and energy – rose just 0.2%, slower than expectations. In fact, in September, prices for used cars, apparel, transportation services, and medical services all dropped from August.

The reality here is that inflation was red-hot in April, May, and June, when core CPI was rising by 0.7% to 0.9% every month.

However, since then, core CPI growth has slowed to a crawl, rising by just 0.1% to 0.3% every month, as supply chains have gradually been restored and price pressures have eased.

For what it’s worth, where core CPI growth is today – around 0.2% month-over-month – is the pre-Covid norm for inflation growth. So, in essence, inflation trends are back to “normal.”

That’s why the bond market rallied – and yields dropped – in response to yesterday’s ostensibly red-hot CPI print.

Its also why tech stocks are regaining their strength.

Throughout trading on Wall Street yesterday, rate-sensitive tech and growth stocks were in rally mode, while less rate-sensitive cyclical and value stocks struggled.

We suspect this trend will persist.

Today’s inflation trends are entirely supply-driven. Covid-19 disrupted supply chains over in Asia, reduced manufacturing capacity at the hundreds of production plants over there, and caused an enormous supply shortage. But Covid-19 caseloads globally are dropping.

Government restrictions are easing. And, as these trends persist into 2022, Covid-related supply chain disruptions will abate.

All those 50%-online production plants in China will hit 100% production capacity in 2022. The supply shortage will ease. Demand-supply dynamics globally will rebalance. Inflation will drop off.

As all that happens, tech stocks will roar higher.

Because, at the end of the day, technology is taking over our world. We watch movies through a tech platform called Netflix (NASDAQ:NFLX). We shop through a tech platform called Amazon (NASDAQ:AMZN). We read through a tech platform called Google (NASDAQ:GOOG, NASDAQ:GOOGL). We communicate through a tech platform called Facebook (NASDAQ:FB). We work through a tech platform called Zoom.

Technology is reshaping every facet of our daily lives.

It is the single most disruptive force – and single largest wealth-creating force – in the history of financial markets.

Lots of folks forgot about that in 2021, amid unusually hot inflation trends and a once-in-a-lifetime, never-going-to-happen again physical economy reopening.

But we didn’t. In our flagship investment research product, Innovation Investor, we remained steadfastly bullish on the innovative companies and breakthrough technologies reshaping our lives.

And now, we believe our portfolio is positioned to fly higher.

We earnestly believe that, over the next 12 to 24 months, tech stocks will surge like they haven’t since the late 1990s dot-com boom – and that our portfolio is perfectly positioned to capitalize on this boom.

Mark my words: This is an opportunity you don’t want to miss.

So… what’re you waiting for?

Click here to capitalize on the biggest wealth-creating force in human history.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

The post Ignore the Media – Inflation Isn’t Heating Up, It’s Cooling Off appeared first on InvestorPlace.

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Economics

Why a Bear Market in Bonds Points to a Weakening Economy

After closing at 0.53 percent in July 2020 the yield on the ten-year US T-bond moved relentlessly higher, closing on Tuesday, September 28, 2021, at 1.55…

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After closing at 0.53 percent in July 2020 the yield on the ten-year US T-bond moved relentlessly higher, closing on Tuesday, September 28, 2021, at 1.55 percent. There is a growing likelihood that the July 2020 figure of 0.53 percent might have been the lowest point.

How should we view this in the context of historical trends in bond yields?

First, it is important to consider the behavioral foundations of bond buying.

As a rule, people assign a higher valuation to present goods versus future goods. This means that present goods are valued at a premium to future goods. This stems from the fact that a lender or investor gives up some benefits at present. Hence, the essence of the phenomenon of interest is the cost that a lender or an investor endures.

An individual who has just enough resources to keep him alive is unlikely to lend or invest his paltry means. The cost of lending or investing to him is likely to be very high—it might even cost him his life if he were to consider lending part of his means. Therefore, he is unlikely to lend or invest even if offered a very high interest rate. Once his wealth starts to expand, the cost of lending or investing starts to diminish. Allocating some of his wealth toward lending or investment is going to undermine to a lesser extent our individual’s life and well-being at present.

From this we can infer, all other things being equal, that anything that leads to an expansion in the wealth of individuals gives rise to a decline in the interest rate, i.e., the lowering of the premium of present goods over future goods. Conversely, factors that undermine wealth expansion lead to a higher interest rate. Observe that while the increase in the pool of wealth is likely to be associated with a lowering in the interest rate, the converse is likely to take place with a decline in the pool of wealth.

People are likely to be less eager to increase their demand for various assets, thus raising their demand for money relative to the previous situation. All other things being equal, this will manifest in the lowering of the demand for assets, thus lowering their prices and raising their yields.

Note again, that increases in wealth tend to lower individuals’ time preferences whereas decreases in wealth tend to raise time preferences. The link between changes in wealth and changes in time preferences is not automatic, however. Every individual decides how to allocate his wealth in accordance with his priorities.

Changes in Money Supply and Interest Rate

An increase in the supply of money, all other things being equal, means that those individuals whose money stock has increased are now much wealthier than before the increase in the money supply took place. Hence, this will likely give rise to a greater willingness in these individuals to purchase various assets. This leads to the lowering of the demand for money by these individuals, which in turn bids the prices of assets higher and lowers their yields.

At the same time, the increase in the money supply sets in motion an exchange of nothing for something, which amounts to the diversion of wealth from wealth generators to non–wealth generators. The consequent weakening in the wealth formation process sets in motion a general rise in interest rates. This implies that an increase in the growth rate of money supply, all other things being equal, sets in motion only a temporary fall in interest rates. This decline in interest rates cannot be sustainable because of the damage to the process of wealth generation.

Conversely, a decline in the growth rate of money supply, all other things being equal, sets in motion a temporary increase in interest rates. Over time, the fall in the money supply encourages a strengthening of the wealth formation process, which sets in motion a general fall in interest rates. We can thus see that the key to the determination of interest rates is individuals’ time preferences, which are manifested in the interaction of supply and demand for money. Also note that in this way of thinking the central bank has nothing to do with the determination of the underlying interest rates. The policies of the central bank only distort where interest rates should be in accordance with time preferences, thereby making it much harder for businesses to ascertain what is really going on.

Assessing Historical Long-Term Yield Trends

From 1960 to 1979 the yields on the long-term US Treasury bond had been following a visible uptrend (see chart). From 1980 until now, the yields were following a downtrend (see chart).

10-year T-bond yields vs trend
10-year T-bond yields vs trend

From 1960 to 1979 we can also observe that the yearly growth rate of money supply (AMS) followed a visible uptrend (see chart). This caused a strong weakening in the wealth generation process on account of the exchange of nothing for something. The weakening of the process of wealth generation due to the uptrend in the growth momentum of money supply lifted individuals’ time preferences, and this placed the underlying long-term yields on a rising trend.

AMS vs trend
By contrast, the declining trend in the yearly growth rate of AMS that we can observe from 1980 to 2007 was instrumental in the strengthening of the process of wealth generation (see chart). This was an important factor in the declining trend in long-term yields during this period.
AMS vs trend
AMS vs trend

From 2008 to 2011, the yearly growth rate of AMS followed a visible rising trend (see chart). This most likely undermined the process of wealth generation again. The uptrend in the money supply growth rate enriched the early recipients of the newly pumped money, and as a result, their demand for various financial assets including Treasurys increased, in the process lifting the prices of these assets and lowering their yields. Despite large increases in money supply, the early recipients of the monetary increases benefited by being ahead timewise of the overall wealth erosion effect. This in turn also prevented the upward pressure on interest rates.

The massive increases in money supply from 2019 to February 2021 have likely severely undermined the process of wealth generation (see chart). Note that the yearly growth rate of AMS stood at 79 percent in February 2021. Also note that the yearly increase in dollar terms stood at an unprecedented figure of $4.2 trillion in February 2021. If one adds to this the reckless fiscal policy of the government this amounts to a severe weakening of the process of wealth generation and has likely placed long-term yields on a rising trend, which may have started in July 2020.

AMS vs trend

The erosion in wealth formation has already set in motion the weakening in economic activity and the decline in the momentum of inflationary bank lending. This type of lending is an important ingredient in the growth rate of money supply. The likely further decline in the pool of wealth raises the likelihood of a further decline in the growth rate of inflationary lending and the growth rate of money supply (see chart).

AMS vs inflationary credit

A fall in the growth rate of money supply will weaken the wealth increases of the early recipients of money. Consequently, they are probably going to reduce their demand for financial assets, exerting an upward pressure on yields. If the economic slump is of a severe nature, this will result in a prolonged decline in the momentum of inflationary credit. Consequently, a strong decline in the money supply growth rate will emerge. As a result, the uptrend in long-term rates could be of long duration.

This uptrend is likely to take place despite the positive influence of the expected decline in the momentum of money supply on the wealth generation process. Note that the likely Fed and government policies to counter the emerging economic slump will delay the liquidation of various nonproductive activities, thereby slowing down the revival of the pool of wealth.

These activities, also known as bubble activities, have emerged on the back of loose monetary and fiscal policies. As a result, bubble activities are likely to continue to undermine the process of wealth generation with such policies in place. This in turn is going to prolong the bear market in Treasury bonds.

Conclusion

It is likely that the bull market in T-bonds ended around July 2020. On account of past strong increases in money supply, the process of wealth generation has probably been weakened significantly. This has set in motion the decline in the inflationary credit momentum and the consequent decline in the momentum of money supply.

As a result, this is expected to set in motion a visible rise in long-term interest rates. Attempts by the Fed and the government to counter the economic slump are likely to weaken further the pool of wealth and make the economic climate much more severe.

Note that once the pool of wealth starts to decline, aggressive monetary and fiscal policies can only weaken this pool, thereby weakening the heart of economic growth. If loose monetary and fiscal policies could strengthen the pool of wealth, then world poverty would have been eliminated a long time ago.

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Economics

The Fed’s FOMC Minutes Suggests Taper Will Start In November

The Fed’s FOMC minutes from the September meeting suggest the Fed will taper its asset purchases by $15 trillion a month starting in November. At that…

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The Fed’s FOMC minutes from the September meeting suggest the Fed will taper its asset purchases by $15 trillion a month starting in November. At that pace, the current $120 trillion of QE will get zeroed out by July. Currently, there was no timeline to raise interest rates, but over the last few weeks, Fed Funds futures have priced in greater odds of rate hikes in 2022.

For instance, the June 2022 contract now implies a 25% chance of a tightening by June. The odds were near zero in mid-September. The December 2022 contract suggests a 100% chance of a 25bps rate hike and a 50% chance of a second hike by the end of the year.

With more certainty around the Fed’s next steps, the markets are entering a new regime. Is your portfolio ready?

What To Watch Today

Economy

  • 8:30 a.m. ET: Initial jobless claimsweek ended Oct. 9 (320,000 expected, 326,000 during prior week)
  • 8:30 a.m. ET: Continuing claims, week ended Oct. 2 (2.670 million expected, 2.714 million during prior week)
  • 8:30 a.m. ET: Producer price index, month-over-month, September (0.6% expected, 0.7% during prior month)
  • 8:30 a.m. ET: PPI excluding food and energy, month-over-month, September (0.5% expected, 0.6% during prior month)
  • 8:30 a.m. ET: PPI, year-over-year, September (8.7% expected, 8.3% during prior month)
  • 8:30 a.m. ET: PPI excluding food and energy, year-over-year. September (7.1% expected, 6.7% during prior month)

Earnings

Pre-market

  • 5:55 a.m. ET: UnitedHealth Group (UNH) to report adjusted earnings of $4.39 per share on revenue of $71.13 billion
  • 6:45 a.m. ET: Bank of America (BACto report adjusted earnings of 71 cents per share on revenue of $31.74 billion
  • 6:45 a.m. ET: US Bancorp (USBto report adjusted earnings of $1.15 per share on revenue of $5.76 billion
  • 7:00 a.m. ET: Walgreens Boots Alliance (WBA) to report adjusted earnings of $1.00 per share on revenue of $33.07 billion 
  • 8:00 a.m. ET: Wells Fargo (WFCto report adjusted earnings of 97 cents per share on revenue of $18.40 billion
  • 8:10 a.m. ET: The Progressive Corp. (PGR) to report adjusted earnings of 21 cents per share on revenue of $11.96 billion
  • 7:30 a.m. ET: Morgan Stanley (MS) to report adjusted earnings of $1.69 per share on revenue. of $13.92 billion
  • 7:30 a.m. ET: Domino’s Pizza (DPZ) to report adjusted earnings of $3.11 per share on revenue of $1.04 billion
  • 8:00 a.m. ET: Citigroup (C) to report adjusted earnings of $1.79 per share on revenue of $16.93 billion 

Post-market

  • 4:10 p.m. ET: Alcoa (AA) to report adjusted earnings of $1.71 per share on revenue of $2.93 billion

Courtesy of Yahoo

Market Testing Overhead Resistance

Yesterday, the market rallied back to the 100-dma, which now acts as resistance to higher prices. However, while the market tried to climb above it during the trading day, it failed to do so. This morning, futures are pointing higher which will push the index above both the 100-dma and 20-dma. If the rally holds, such will set up an advance to the important 50-dma.

With Friday being options expiration, the volatility seen this week is not surprising. However, the good news is that the overall decline has been very orderly, with no real signs of panic. Such suggests that once the current consolidation period is behind us, we will see a modest advance into year-end.

On a longer-term basis, valuations, internal deterioration, reduction in liquidity, and slower economic growth pose serious challenges to the markets in 2022. As such, we continue to suggest a modicum of risk management currently, with a more deliberate approach to protecting capital as the calendar changes.

Will The Fed Taper Sooner and Harder?

How Do Stocks Perform Under Stagflation?

Goldman Sachs recently published some analysis showing how stocks perform under various inflationary and economic environments. The most notable is the relative performance of stocks in a “slow growth and high inflation” environment. Or, rather what is more commonly known as “stagflation.”

Everything You Need To Know On “Net Zero”

Over the next couple of decades it is expected that global governments will pursue $150 Trillion in spending (mostly derived from debt) to achieve a victory over climate change. While this is great for wealthy, the poor and middle classes will ultimately pay the price through slower economic growth and inflationary pressures. BofA produced the following graphic on where the money will go and, by extension, who will benefit.

CPI Hotter than Expected

CPI came in slightly higher than expectations. The monthly rate of price increases is 0.4%, 0.1% higher than last month. The year-over-year rate, at 5.4%, is also a tad above expectations. The core monthly and annual rates, excluding food and energy, are in line with consensus.

It is important to note that some inflation resulted from deflation or lower prices this time last year. While “base effects” are rapidly lessening, they are still in play. Per Ben Casselman of the N.Y. Times- “Base effects” — the impact of the drop in prices earlier in the pandemic — are still playing some role in lifting year-over-year inflation. If prices had kept rising at their pre-Covid rate last year, September inflation would have been 5% instead of 5.4%.”

Chaikin is Providing a Warning

The graph below shows the S&P 500 with the Chaikin Money Flow indicator below it. The indicator looks back over 20 days and multiplies the daily volume with the market closing within each day’s trading range. The multiplier is positive when the S&P closes in the upper half of a day’s trading range. Likewise, where the market closes in relation to the high or low is multiplied by the volume. Thus, high volume and a close at the high or low for the day will produce a strong signal.

Technical analysts use the indicator to help determine if institutions are accumulating or distributing. A green reading (above zero) signals accumulation as it is believed institutions tend to buy late in days. Conversely, the strength of the recent string of red days signals early strength gets followed by late-day weakness. Such is a sign of institutional distribution (selling). The Chaikin indicator has not been this profoundly negative since 2018.

“Broadening, Not Transitory”

Atlanta Fed President Bostic went where no Fed member has gone since the pandemic. He stated, “U.S. inflation is broadening, not transitory.” Such appears to be the first time a Fed member voiced concern that higher inflation is no longer transitory. If other Fed members join him in this view, it might speed up the tapering process and bring forward the date of the first rate hike.

Humorously, he started his speech with disdain for the use of “transitory” to describe the recent bout of inflation. To wit: “You’ll notice I brought a prop to the lectern. It’s a jar with the word “transitory” written on it. This has become a swear word to my staff and me over the past few months. Say “transitory,” and you have to put a dollar in the jar.”

The post The Fed’s FOMC Minutes Suggests Taper Will Start In November appeared first on RIA.

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