...Wall St burst into exuberance overnight, with Dow +740pts, S&P500 +2.05% to 5,921 and Nasdaq +2.47% both back to levels we saw a week ago.
...after Trump's capitulation to tariffs on both China and EU, it looks like the market now largely ignores his tariff bluster, until the next one arrives. But with the worse of China and EU tariffs possibly out of the way, unless Trump reverses his reversal, in the short term it has provided a clear path for markets to go higher.
...Even 10yr yield has moderated for now to 4.44pc, all awaiting the closely watched PCE data tomorrow
...unlikely optimism arrived after Conference Board Consumer Confidence unexpectedly jumped to 98 vs 87 est probably due to unrealised worst fears.
...however, commodities do not share market optimism, copper was down to $4.74 from $4.82, Crude WTI -0.31%, XLE was +0.87% though, lithium stocks were mixed (ALB+2.05%, SQM -0.82%, LAC -2.64%), BHP -0.14%, Rio -1.27%
..Gold holds $3,300 but down -$41 or -1.23%, GDX and GDXJ lower by -1.5% and -1.47% respectively, as DXY recovered from under 99 to 99.59.
Master trader Jeff Clark calls the chart below “the most dangerous chart in the financial markets.”
We’re looking at the iShares 20+ Year Treasury Bond Fund (TLT), an exchange-traded fund that tracks the action in long-term Treasury Bonds.
Here’s Jeff’s analysis: As bond prices fall, longer-term interest rates rise. And rising rates are bad news for stock prices...
TLT looks set to fall. That means longer-term rates are set to rise…
Stock market investors have ignored this situation, so far. TLT is down 8% over the past six weeks. Yet, the S&P 500 is sharply higher.
Somebody is lying.
Stocks and Treasury bonds typically move in the same direction. So, this sort of divergence is notable.
To illustrate Jeff’s point, below, we look at TLT (in black) and the S&P (in green) over the last two months.
Notice how they move roughly in parallel until the end of April when they sharply diverge. So, who is “lying?”
Let’s rephrase the question…
Whose assessment of upcoming market conditions is less likely to play out?
The divergence boils down to alternative outlooks about the economy and financial condition of our government.
The stock market is priced for rosier conditions while the bond market is more pessimistic.
To help us unpack the distinction, let’s begin with bonds.
Here’s Jeff: [Bond yields are rising] at a time when the US Treasury has to refinance trillions of dollars in maturing debt, and when the US Government is trying to pass a budget that will add trillions more to the deficit.
The recent price action in long-dated bonds reflects the return of the “Bond Vigilantes.”
To make sure we’re all on the same page, the term "Bond Vigilantes" was coined by economist Ed Yardeni in the 1980s. It refers to bond investors who sell off Treasurys in response to what they perceive as irresponsible fiscal or monetary policies, like excessive government spending or inflationary policies. By dumping bonds, they drive up yields, effectively punishing governments with higher borrowing costs.
These investors act like “vigilantes” in the market, enforcing financial discipline when policymakers stray.
So, what policy “straying” is happening today?
Jeff referenced it a moment ago – the Trump Administration’s “big, beautiful” budget bill.
Here’s CNN Business: The nonpartisan Congressional Budget Office estimates that President Donald Trump’s “big, beautiful bill” would pile another $3.8 trillion to that mountain of debt.
That kind of extra borrowing would only amplify growing concerns about America’s unsustainable financial trajectory.
For context on our current debt, the U.S. budget deficit grew to $1.83 trillion last year. That’s equivalent to 6.4% of U.S. economic output, marking the highest reading ever other than the COVID-19 pandemic.
And as of last month, (covering the first half of the fiscal year), the deficit climbed to more than $1.3 trillion. That is the second-highest six-month deficit on record (second only to Covid).
Then there’s the overall national debt that is ballooning – and accelerating. It’s now nearly $37 trillion, growing at more than $1 trillion about every 100 days.
The current debt-to-GDP ratio clocks in at 123%. This is unsustainable over the long term.
Adding another $3 trillion of debt in the “big, beautiful” bill moves us in the wrong direction. We’re headed toward an economic or currency collapse.
The bulls’ response? A big yawn
Our government wasn’t exactly a paragon of fiscal responsibility prior to Trump’s “big, beautiful” budget bill.
You don’t rack up a national debt of $36.9 trillion without decades’ worth of unbridled reckless spending…and yet the stock market is less than 5% below its all-time high.
Bulls would argue that proclaiming “stock market doom” based on “federal spending gloom” is a paper tiger. So, assuming a defensive market posture today could be a self-inflicted stumbling block toward achieving your investment goals.
For this angle, let’s go to Luke Lango. From his Innovation Investor Daily Notes last week: This debt fear cycle? It’s a rerun.
A tired, predictable, endlessly re-aired episode of “Wall Street Panic Theater.”
The U.S. debt has been ballooning since before the iPhone existed, and guess what? The market is up more than 600% since then.
Why? Because U.S. debt is backed by the most powerful, dynamic, innovation-rich economy in the history of the world.
Let’s just put it plainly: Amazon, Microsoft, Nvidia, Apple, Meta, and Tesla run the global economy. They generate trillions in market value, drive innovation in nearly every sector, and — crucially — they all pay taxes to Uncle Sam.
As long as those companies are thriving, the U.S. government will continue to find plenty of buyers for its debt.
So no, the debt panic isn’t something new. And every single time it’s popped up, it’s created a great opportunity to buy stocks.
This time is no different. Now, bears might respond, “but even if the government avoids a reckoning, the bond market is still sending signals about inflation that you’re ignoring”
Last Friday, Chicago Federal Reserve President Austan Goolsbee said that President Trump’s tariffs – and threatened tariffs – are likely to keep the Fed from lowering rates until inflation trends are easier to see.
As to “threatened tariffs,” last Friday, Trump – frustrated with a perceived lack of progression with the European Union (EU) – called for a blanket 50% tariff on all EU goods to begin on June 1.
But on Sunday, following a call with EU Commission President Ursula von der Leyen, Trump agreed to push that date back to July 9. The market is jumping today on the good news.
While we’re pleased to have avoided a selloff, this “stop/start” of tariffs is prolonging and intensifying the economic uncertainty that’s kept the Fed on the sidelines so far this year. And it looks like “more of the same” is on the way.
Here’s CNBC: The Fed likely will be on hold as it evaluates the ever-changing trade policy and how it affects inflation and employment.
“Everything’s always on the table. But I feel like the bar for me is a little higher for action in any direction while we’re waiting to get some clarity,” Goolsbee said…
“Over the longer run, if they’re putting in place tariffs that have a stagflationary impact … then that’s the central bank’s worst situation.”
“So I think we’ll have to see how big the impacts on prices are,” he added.
Bond traders – more than stock traders – are viewing the markets as does Goolsbee. We see this by returning to TLT, which Jeff Clark highlighted at the start of this Digest.
TLT targets U.S. government bonds with maturities for 20+ years. Such long-dated Treasuries serve as a barometer for the market’s long-term outlook on inflation. When long-term bond yields rise sharply, it often reflects concerns that inflation will remain elevated for years – not just temporarily.
With this context, here’s Jeff: Now it looks like TLT is set to lose the support of the $84 level. If that happens, we could see a quick drop to the October 2023 low near $78.
That would put long-term interest rates near 5.6%, or even a bit higher. We haven’t seen long term rates that high in 20 years…
Either long-dated bonds or stocks are due for an epic reversal. Either Treasury bonds need to rally to catch up with the action in stocks, or stocks are going to be pulled down to match the action in bonds.
As I write Tuesday, TLT is rallying alongside stocks. So, advantage bulls, at least for the moment.
