Most are perplexed as to why Treasury yields are rising with such a poor employment number.  The discussion is perhaps more intense than the one of the last three months as too why yields were falling with multi decade high inflation.  The 10-year has increased in yields about 27 basis points in quick order, retracing almost half of the decline that commenced in mid-May.

Perhaps we can invoke FRB Chair’s explanation…it is technical in nature or the explanation used when all other explanations appear not valid.

The FRB is adamant inflationary pressures are transitory.  The Fed states wages will cease rising and perhaps decline when workers reenter the workforce following the September 7 expiry of enhanced employment benefits.  Powell stated national income is perhaps at cycle peak.

The St. Louis Fed recently published a report commenting about the income of the 27 states that have already ended enhanced benefits.  The report clearly states income has not declined, searching for an explanation with the prevailing view of a flourishing underground economy.  I rhetorically ask is this a reason why the Treasury Department is demanding increased deposit reporting from community banks that rival that of the mega sized brethren?

I must write the St. Louis Fed did state the data is too immature to make solid conclusions.

Referencing a JP Morgan report from last week, today the 10-year Treasury is broaching a 1.40% yield.  The Bank wrote “any move above 1.40% will create a bearish medium-term movement dynamic in which selling pressures has an increased chance of creating more selling pressure, the inverse of the aggressive rally that caused rates to fall to 1.12% last month.”

As widely noted growth—aka mega size tech—has been on a torrid advance, an advance that commenced with the decline in yields.  CNBC commented about the valuation and earnings gap between value and growth, both of which are at extremes but at opposite ends of the spectrum.

The first quarter experienced a historical transition from growth to value, a transition that has been greatly discussed.  This was the same period that the 10-year Treasury increased to a 1.65% yield from around 0.90% in about 90 days.

CNBC was opining if yields continue climb, the odds of yet another transition will rise.  CNBC also commented current and full year earnings growth will be greater for the value even if GDP declines to a 3.5% annual pace.

As discussed, many times, equity valuations are primarily determined by present and future cashflows discounted by some interest rate.  CNBC concluded the report with an ominous warning from Bank of America stating that earnings growth for many companies with a low tax rate “will be vaporized” via a possible change in the tax code.

We are living in incredible times.  In some regards the future is very opaque.  In other ways it is not.

Today the JOLT survey is released.  Analysts are expecting 10.049 million job vacancies, slightly lower than the record 10.073 million openings of last month.  This data is in direct contradiction to Friday’s labor report.  Or is it if we accept the St. Louis Fed report about an “underground economy.”

Commenting on yesterday’s market equities fell on growth concerns.  Treasuries also fell in price, the inverse of the expected reaction.

Last night the foreign markets were down.  London was down 0.44%, Paris down 0.38% and Frankfurt down 0.62%.  China was down 0.04%, Japan up 0.89% and Hang Seng down 0.12%.

The Dow should open moderately lower on valuation concerns and continued regulatory crackdown in China.   Some are beginning to doubt the necessity of tapering even as inflation accelerates due to supply shocks that don’t appear to be “transitory.”  The 10-year is up 4/32 to yield 1.36%.


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.