The Beige Book, or the statistical compilation utilized at the upcoming Fed meeting, noted a “downshift” in the pace of economic activity, albeit “only a slight one.”  The culprit was a decline in leisure and hospitality given a stagnation in hiring.

The Beige Book also stated there are “widespread” supply shortages and bottlenecks that is creating “severe disruptions.”  As for prices, inflation was characterized as “steady at an elevated pace, roughly 5% per annum.”  Most Fed districts reported plans for “significant” price hikes in the months ahead.

In conclusion, the report stated “the economy is downshifting because of supply constraints rather than a shortfall in demand.”

All of the above is recipe for higher prices but the question is whether financial assets or the Fed will care as long as both continue convincing themselves inflation is transitory.

Speaking of strength, the JOLTS job survey posted its fifth consecutive record.  Job vacancies rose to 10.934 million and the prior month was revised higher. Analysts had expected a slight decline to 10.094 million.  The Beige Book implicitly referenced the JOLTs survey utilizing it as evidence of the dearth of workers and huge demand for such.

The Fed (and the markets) are convinced labor supply will surge in the weeks ahead, a surge that will quell wage inflation.  Will this occur?

The answer can be pivotal.

Treasuries rallied nominally on the Beige Book, keying in on the word “downshift” in the pace of economic activity.  Equites also declined, focusing instead on valuations and potential reduction in central bank stimulus.

Bloomberg writes “there is record deal flow for both rated and non-rated corporate bonds with many companies rushing to market perhaps before the distinct possibility of higher rates in the not so distant future.”

I rhetorically ask are companies more fearful than the Fed and the markets?  I think the answer is yes given their first-hand observations of supply constraints that has impacted prices.  Raise money today before the cost rises.

Changing topics, many times I have commented about the bullishness of option call buying.  Recent data is suggesting retail call buying—defined as buying 10 or less out of the money short dated contracts—has slid to a 15-month low for the exception of the demand for such on a few mega sized tech issues.  It is believed once retail volumes subside, “there will be considerable downside” according to Vanda Research.

It is generally accepted the retail option buyer is wrong.  Will this again be a truism?

As noted yesterday, in many regards’ tomorrow is very opaque.  In other regards it is extremely lucid.  Perhaps the greatest possible change of today versus that of the last 40 years are interest rates.  Bond legend Bill Gross believes today’s transition is as tectonic as the transition that occurred over 40 years ago but is on the other end of the book holder.

What will happen today?

Last night the foreign markets were down.  London was down 1.12%, Paris down 0.19% and Frankfurt down 0.20%.  China was up 0.49%, Japan down 0.57% and Hang Seng down 2.30%.

The Dow should open moderately lower on growth concerns and the prospect of reduced central bank stimulus.  The 10-year is up 1/32 to yield 1.34%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. 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. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.