The SP500 moved from the bottom of the price channel to the top within the day on 13 April. The price channel is declining so today’s move up means little so far.
On the 13th all asset classes moved higher. The tide rose and all ships in the harbor rose. The question is what caused the tide to rise today. We know tech has been moving opposite to interest rates and interest rates pulled back a little today. This means bond prices rose today, but so did oil & metals.
If the Bank of Japan is buying US Treasuries to slow the rise of global interest rates, then it would make sense the tide rose as this buying would spread out to all asset classes in the US. The Bank of Japan announced they intervened to keep their interest rate capped under 0.25% a couple of weeks ago – and then we found out later they were actually buying UST and not Japanese bonds to cap their own rates.
When the Bank of Japan bought US Treasuries for 4 days, the US stock market put in a higher peak at the end of March than it would have otherwise. I bring this up because rising US yields are causing problems for both Europe and Japan who are trying to cap their own rates. Their actions counteract our own central bank and our own free market attempts to set interest rates.
With inflation coming in above 8% and PPI surging even higher in March our inflation rate is not ready to reverse lower. Never before has US interest rates been this far behind inflation.
Under the cover of inflation many US corporations raised prices significantly and this boosted earnings in the short run. This seemed to have happened in the past when inflation took off. But as inflation takes bites out of pocketbooks and devalues slower rising wages, a recession will crept in and those profit margins will collapse. And the stock market has a tendency to lead economic reporting by 6 months.
So if profts are going to fall in the second half of 2022, then expect the stock market to head down further soon.
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Categories: Perspectives