A Big Moment for the Markets
Powell – Part II... The story is the same... The jobs market is still strong... Why Greg Diamond is watching interest rates... This inverted yield spread makes a scary new low... A big moment for the markets...
Today was 'Powell – Part II'...
Federal Reserve Chair Jerome Powell sat down in Washington, D.C. again today for the second part of his semiannual testimony before Congress – this time before a House of Representatives committee.
This two-day process can be repetitive. But the good thing is you can see whether the market's reaction to the Senate testimony sparks any changes when the chair arrives at the House 24 hours later.
As we wrote yesterday, the benchmark S&P 500 Index sold off 1.5% on Tuesday based on Powell's comments in front of the Senate. Speaking in that chamber of Congress, Powell said the latest economic data "suggests that the ultimate level of interest rates is likely to be higher than previously anticipated."
On the other side of the Capitol, this morning's session began with Powell receiving the opportunity to clarify. He was specifically asked to give thoughts on what he said yesterday and what that means regarding the Fed's upcoming policy meeting later this month.
Powell didn't do an about-face...
But he did couch some of his comments... In particular, Powell specified today that "no decision has been made" about higher rates. Still, he doubled down on his main point from a day earlier.
He also added, as we noted yesterday, that more data could change things in the weeks ahead. This could include the February consumer price index ("CPI") numbers due out March 14... and a bunch of jobs data.
About that...
The newest piece of data that the Fed will peruse was published this morning, right as Powell spoke before the House...
This one is a monthly job-openings report from the U.S. Bureau of Labor Statistics. It showed the same story we've known for a while: a stronger-than-expected jobs market... meaning no reason for the Fed to steer off its rate-hiking course.
The number of job openings in the U.S. decreased by 410,000 to 10.8 million by the final day of January. Wall Street had expected 10.5 million, and more job openings is bad news for the Fed's inflation fight... Plus, the numbers for December were revised higher to show 200,000 more job openings than previously reported.
In all, businesses are still offering up roughly 11 million job openings in the U.S. today. That's not a huge decline since the Fed began raising interest rates to cool the economy, as our Stansberry NewsWire shared today...
Overall, in January, there were nearly 1.9 available jobs for every job seeker. Before the pandemic – when money shot out of the government printing press at an unprecedented rate, and millions of people stopped working for a variety of reasons – the average was 1.
So, at the moment, there's no compelling reason for the Fed to change the policy track that Powell suggested again yesterday and today... higher interest rates for longer. Get used to it – even if it causes a recession.
As a side note...
I've mentioned the yields on Treasury securities being an attractive option to park cash several times lately. Well, at least some foreign investors in the world's third-largest economy agree...
According to Scott, Japanese investors were net buyers of U.S. sovereign debt in January for the first time in five months, as that country deals with high inflation for the first time in decades.
Today, neither Treasury yields nor stock prices moved significantly...
Powell's soft qualifiers and the latest jobs data apparently didn't have as much influence on things as the Fed chair's testimony yesterday... Still, you'll want to keep a close eye on the direction of stock prices and bond yields over the next several weeks...
We might be getting to a telling inflection point for both – and big trends in the markets in general... Our friend and colleague Greg Diamond, editor of our Ten Stock Trader service, had a great post about this today for his subscribers.
In fairness to Greg's subscribers, we won't share everything, but I do want to give a taste because it's important for anyone with money in the markets to understand. As Greg stated, if yields drop – which they've started to do slightly for longer-duration Treasurys – and stocks rise...
It means this market is calling the Federal Reserve's bluff on raising rates... inflation is topping out (according to the market)... and bonds have bottomed/interest rates topped. This would line up with the bullish scenario in stocks as the worst is behind us.
This has been the story of late.
As we've noted, even with bond yields where they are, and after a broad stock sell-off throughout February, the major U.S. stock indexes are still trading above their 200-day moving averages.
However, as Greg noted, there's the other side of the story to consider... What if bond yields drop and stock prices break down to new lows, too? That would mean a pretty big shift in market sentiment is afoot.
There are signs it might already be happening...
Yesterday, while stocks sold off, I noticed that short-term yields popped higher on Powell's comments, but 10-year and 30-year yields actually fell a bit. This widened the spreads on many yields even further into negative territory.
The 10-year/2-year yield spread hit a new low of -1.03% yesterday...
That's a number not seen within a downtrend since July 1981, just before a 16-month-long recession. As Greg wrote today...
The interest rate market is pricing in a "hard landing" due to the Fed hiking rates higher and for longer than expected.
Because the market is a discounting mechanism, it starts to price in future events months before anything becomes "official."
So the 10-year and 30-year interest rates topped out and start to drop (along with stocks) as the economy is going to falter due to inflation, the Fed, jobs losses, etc...
This is the bearish scenario in stocks.
Watch what bond yields and stocks do over the next two weeks and after the end of the Fed's next policy meeting on March 22. If current bond trends continue and stocks sell off, then Mr. Market is likely "pricing in" much more pain to come.
Right now is already a big moment for the markets – and it could get more significant soon.
Why I Know Gold Has to Go Higher
Paul Brink, the president and CEO of precious metals company Franco-Nevada (FNV), sat down with our editor-at-large Daniela Cambone at the 2023 Gold Stock Analyst Investor Day in Florida. Brink explained why he knows gold's price has to go higher...
Click here to watch this episode of The Daniela Cambone Show right now. And to catch more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 3/7/23): inTEST (INTT), NeoGenomics (NEO), and Flutter Entertainment (PDYPY).
In today's mailbag, feedback on yesterday's Digest about the Federal Reserve (and, partly, Congress)... and one astute subscriber notes a change... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"If the Fed is planning on pausing rate hikes when unemployment increases, then consider: (1) With rate hikes already applied, unemployment should already be increasing, except that (2) Federal policy and law is already increasing employment in bringing more 'production' back home.
"This produces employment decreases in some industries but increases in others. This cycle, recession cannot be measured by overall employment, although much pain will be felt among many employees and businesses." – Paid-up subscriber Kevin S.
"It seems like the Democrats come into power and spend a lot of government money causing the deficit to rise, not that Republicans are not also complicit. Then Republicans get back in and lower taxes which also increases the debt. They are also not adverse to spending, just on different issues. Neither party has shown any fiscal responsibility..." – Paid-up subscriber John Y.
"It seems clear that years of low-interest monetary policy have put so much into the money supply that the economy is going to be very resistant to the Fed's attempts to curb inflation. Only steady pressure over a lengthy period is going to have the desired results, likely 1-3 years. It is also probably going to require that Congress and the Administration show fiscal maturity. It may also require that the Fed reexamine its 2% target for inflation, which by itself guarantees nearly a 50% devaluation of the dollar over 20 years." – Paid-up subscriber Rod B.
"I am no fan of the Fed and the greatest and easiest way to get our government to understand how to wisely spend money would be getting back on the gold standard with gold getting readjusted on a per ounce basis. It would make government be like how the rest of the world lives. If you don't have it you don't spend it. The reason we are in this [is that when they] spend like drunken sailors, money doesn't have any value. If we need it we will just print more [which] has created this mess in the first place and that all happened by being taken off the gold standard in the first place. Congress doesn't control the Fed although many believe [they] do, and zero interest rates is why we are here now!" – Paid-up subscriber James S.
"I for one want to thank you all for what seems lately to be shorter evening Digests. I read so much market material during the day and I appreciate the shorter Digests lately." – Paid-up subscriber Jerry B.
Corey McLaughlin comment: Jerry, your sense is correct. I've tried to make our daily reports here a little shorter lately, so thanks for the feedback.
I'm curious to hear more thoughts... Are our Digests too short? Too long? Just right? For everyone, what do you want to see or read, or rather us not do, each day? Let us know with an e-mail to feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
March 8, 2023