Fasten your seatbelts, it’s going to be a bumpy ride

What we got here is a stock market that finally looks vulnerable as Treasury yields surge, oil prices look like they could easily hit USD 90 a barrel, and as supply chain issues show no signs of easing.  Margo Channing said it best when she played Bette Davis in the movie All About Eve, “Fasten your seatbelts; it’s going to be a bumpy night.”

There is a lot of drama happening on Wall Street and most of it has to do with a reset of inflation expectations.  This surge in Treasury yields is kryptonite for the Nasdaq and will ultimately drag down growth forecasts.  The Fed was willing to tolerate a little inflation overshoot, but the current energy crunch could force a major pivot before the end of the year.

US stocks are strictly following the bond market selloff, which is coincidentally accompanied with slowing economic data, and standard comments from Treasury Secretary Yellen and Fed Chair Powell.  No one expects the US to default, but Wall Street will undoubtedly show some nervousness.  JPMorgan CEO Dimon has his bank preparing for a potential US credit default as debt limit talks go down to the wire.

Yellen/Powell

Treasury Secretary Yellen’s testimony to lawmakers included a warning that Treasury is likely to exhaust its extraordinary measures if Congress has not acted to raise or suspend the debt limit by October 18^th. Yellen reiterated her call for bipartisan responsibility with the handling of the debt ceiling.

Fed Chair Powell reiterated that the US is a long way from meeting its maximum employment test.  Powell’s comments on the debt limit mirror Yellen’s, noting that it’s essential to raise the debt limit to avert defaults.  Powell stuck to the transitory script and reiterated his expectations that higher inflation will abate.

US data a mixed bag

A wrath of US economic data showed that the delta variant impact continues to weigh on the economy and that supply chain issues will likely be seen in next month’s data.  The US advance trade balance data came in wider-than-expected and still close to record high levels.  Given all the struggles with ports, expectations were high that imports would be soft, but a strong reading suggest that might not happen until next month’s report.  The housing market remains the bright spot of the economy after home prices surged 19.7%, the biggest increase in 30 years.  The Conference Board’s consumer confidence index clearly showed the delta variant impact as a surprise drop in the headline (7-month low) was accompanied with significant declines in both the present situation and expectation surveys.  The Richmond Fed Manufacturing Index delivered its first negative reading since last summer.

Today’s economic data helped fuel the inflation debate as pricing pressures will continue since the housing market remains hot, delays in seeing the shipping transportation issues in ports and finding truck drivers have yet to impact August economic data, and as the US consumer is starting to look a little vulnerable.

Gas

European officials are praying for a warm winter.  Surging natural gas prices may threaten an economic recovery that is already on thin ice.  Natural gas fundamentals all point to higher prices: robust Chinese demand, shut-in offshore US production, and low supplies from Russia.  The natural gas market has a supply problem and it doesn’t look like that will change anytime soon.  European leaders are scrambling to do something, but it is unclear what they will contemplate at the energy summit on October 21st.

US natural gas prices skyrocketed above the USD6 level but has erased its earlier gains.  Speculation is growing that natural gas prices could hit the highest levels since the early 2000s around the USD 10 region.

Bitcoin

Surging global bond yields triggered a stronger dollar and a major unwind of risky assets that included all the top cryptocurrencies.  Investors fixated over Fed Chair Powell’s testimony to Congress.  Powell believes that the existing law provides authority for creating a digital currency, but he added that having congressional authorization would be ideal.

Considering the pain across with equities and commodity currencies, the weakness in bitcoin is somewhat relatively contained.  As long as USD 38,000 holds for bitcoin, bitcoin believers may continue to buy this dip.

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