December 13, 2018

Stocks opened modestly higher again today, but soon faded. The Dow is now up 10 pts on the day and the SPX is down .28%. Transports, retailers and banks are down. REITs and utilities are trading higher along with bonds. Commodities are broadly higher, trying to recover from a rough year. WTI crude is trading over $52/barrel. Year-to-date, copper is still down 19%, gold is down 5%, and oil is down about 10%. The iShares Global Agriculture Producers ETF (VEGI) is down nearly 7%. Despite strong economic growth and corporate earnings, cyclical risk-on sectors like energy, materials and industrials have not fared well in 2018.

Bonds are trading higher in price, lower in yield this morning. The 5-year Treasury yield dipped back down to 2.76% and the 10-year yield fell back to 2.91%. As with yesterday, junk bonds are recovering and that suggests perhaps a little less risk in the economic outlook for 2019. When bond traders begin to sniff out an economic slowdown, they usually sell junk bonds quickly.

One of the key data points used by investors to warm of coming recession is a little known data series called Initial Jobless Claims. This weekly report tracks how many Americans are filing for unemployment insurance. Claims have been hovering around multi-decade lows for the last couple of years because the job market has been extremely healthy. But over the past month we’ve heard many voices warning about a spike in claims. It is true that weekly claims rose from about 200,000 to roughly 235,000 over the fall, but I think the panic is premature. Last week, claims fell back to 206,000, taking a little wind of the bears’ sails. So I’m going to adapt the Boy Who Cried Wolf to our situation: the traders who cried recession are wrong again.

November’s Import/Export Price Index generated more questions than answers about inflation. Import prices rose only .7% from year-ago levels, and export prices rose only 1.8%. Both sets of inflation data slowed down quite a bit from October. Obviously, oil prices have been in freefall and that has caused inflation levels to moderate. But even excluding energy, import/export inflation is slowing. How can this be, since trade tariffs have increased this year?

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