The Dow and the NASDAQ were bifurcated as retailers supported the Dow sending that average up 0.7% while tech shares sent the NASDAQ down 0.2%.  Market participants rewarded companies with stronger than expected profit growth (retailers) while punishing shares that are more sensitive to higher interest rates (technology).

Volatility rose throughout the day as the averages swung between gains and losses, evidence of the lack of conviction and liquidity.

Speaking of lack of conviction, bulge bracket firms are equally split between bulls and bears.  The bulls believe the Fed is close to ending this tightening cycle and may reduce rates in 2023. 

The bears believe the Fed is vastly behind the inflationary curve with inflation firmly embedded in the economy via cost push (wage) inflation.  The cost-of-living adjustments (COLAs), the bane of the late 1970s will begin to rear its ugly head in government transfer payments which may then morph into the private sector.

As discussed many times, the current recession is about the lack of supply which is fueling inflation.  The Fed lacks tools to increase supply and Congress is not enacting legislation that creates a conducive manufacturing environment.

The Fed does have the tools to crush demand via higher interest rates.

Many have hypothesized  China has the ability to crush the US via selling their vast Treasury holdings.  While I think the odds of such are low for a myriad of reasons, Chinese holdings of the US Treasury is at a 22 year low.  According to Fed data, China is not a top five holder of our debt, owning $967.8 billion the lowest amount since 2010’s level of $843.7 billion.

Instead of buying Treasuries, the Chinese is investing in their “belt and road initiative” focused in sub-Sahara Africa.

What will happen today?  Retail sales are posted at 8:30 and sales are expected to rise by 0.1%, down 0.1% ex autos.  Yesterday’s data had little market impact.  Capacity Utilization and Industrial Production exceeded expectations.

Housing starts missed by a large margin.  Home sale cancellations rose again in July, equivalent to 16% of properties that went into contract that month.  This is up from 15% in June.  Data suggested the cancellations were greatest in high growth areas such as Jacksonville, Las Vegas and Boise which saw cancellation rates of 29%, 27% and 26%, respectively.

What will happen today?

Last night the foreign markets were mixed. London was down 0.33%, Paris down 0.46% and Frankfurt down 0.93%.  China was up 0.45%, Japan up 1.23%  and Hang Seng up 0.46%.

Dow and NASDAQ futures are down 0.4% and 0.8%, respectively as the Fed’ s aggressive interest rate path outweighed optimism over corporate earnings and China’s stimulus plans. The 10-year is off 18/32 to yield 2.88%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.