24 Aug CITI’S AND MERRILL’S OUTLOOK
Both Citicorp and Merrill Lynch are suggesting the 10-year will yield 2.0% by year’s end. Merrill further stated this increase in yields will cause a 16.5% decline in the S & P 500 as valuations are stretched in “every metric.” If yields rose to 2.0%, Bloomberg analytics suggests the 10-year will have an annual negative return of 12.45%.
Both firms believe the rise in yields will commence around the Jackson Hole Symposium, the result of Fed tapering and longer-term economic rebound, partially the result of surging money supply.
Speaking of money supply, First Trust comments money supply is up 33% since February 2020. Hypothetically prices plus real output should rise by 33%. First Trust comments that inflation will not be 33% given the increase in productivity, but states the increase in money supply is “more excess money than the US economy has absorbed since the 1970s.”
There are only two ways to overcome debt…restructure or inflate. Given the US Treasury is the global benchmark, restructuring is not an option.
Asking rhetorically, will the Fed state the new speed inflation speed limit is now 3.0% versus 2.0%? Last August the central bank stated it would permit both inflation and growth be above this 2.0% speed limit for undetermined amount of time or amount.
Many times, I have commented about the lack of liquidity in the bond market. B of A further quantified this liquidity crisis. The Bank states dealer inventories of investment grade rated bonds has plunged to only 0.2% of total market trading volume from about 5.0% in 2007. The Bank states investment grade issuance has surged 50 fold in the last fifty years.
Wow! What happens if selling really commences? Will the phrase “velocity of change” take a new meaning?
Changing topics, it was released yesterday a purchasing managers index fell to an eight-month low in August, the result of “material shortages, a lack of labor and an upswing in coronavirus infections.” A gauge of supplier deliveries showed greatest lead time in records back to 2007.
Job growth also waned to the lowest since last July but this is the result of “companies either failed to find suitable staff or existing workers switched jobs.”
Because of the above, input price increased in August to the second highest reading in data going back to 2009.
In my view the above is evidence of strength not weakness.
Treasuries were essentially unchanged on the data but equites advance perhaps under the belief the Fed will not commence tapering in the intermediacy. Equities were also bolstered by full approval of Pfizer’s COVID vaccine.
What will happen today?
Last night the foreign markets were mixed. London was down 0.23%, Paris down 0.37% and Frankfurt up 0.33%. China was 1.07%, Japan up 0.87% and Hang Seng up 2.46%.
The Dow should open flat as all awaiting further insights into Fed policy and lingering concerns about the COVID. The 10-year is off 3/32 to yield 1.27%.