Category: Economy

Analysis of the global economy

Posted on

Xi pulls the rug on Trump

Key Points

  • China increased export controls on critical materials where it has a dominant share of production, two weeks ahead of a scheduled face-to-face meeting between leader Xi Jinping and President Trump.
  • The US President has threatened retaliation, including 100% tariffs on Chinese imports.
  • The S&P 500 plunged on Friday, and gold recovered above $4,000 per ounce as investors fear an escalating trade war.

In an escalation of the ongoing trade war between the US and China, China expanded export controls over a range of critical materials just two weeks ahead of a face-to-face meeting scheduled between Chinese leader Xi Jinping and President Trump, at APEC, in South Korea.

BEIJING, Oct 9 (Reuters) – China dramatically expanded its rare earths export controls on Thursday, adding five new elements and extra scrutiny for semiconductor users as Beijing tightens control over the sector ahead of talks between Presidents Donald Trump and Xi Jinping. The world’s largest rare earths producer also added dozens of pieces of refining technology to its control list and announced rules that will require compliance from foreign rare earth producers who use Chinese materials.

In a Truth social post, President Trump said the Chinese move was a “real surprise” and questioned whether the scheduled meeting should proceed.

NEW YORK, Oct 10 (Reuters) – Stocks fell sharply on Friday, with the S&P 500 and Nasdaq suffering their biggest one-day percentage declines since April 10, while Treasury yields dropped and the U.S. dollar weakened as comments by President Donald Trump reignited worries over a U.S.-China trade war. After markets closed on Friday, Trump said he was raising tariffs on Chinese exports to the U.S. to 100% and imposing export controls on “any and all critical software” in a reprisal against recently announced export limits by China on rare earth minerals critical to tech and other manufacturing.

Stocks

The S&P 500 plunged through short-term support at 6700 on fears of an escalating trade war. A follow-through below 6500 would offer a target of 6350 for the correction.

S&P 500

Financial Markets

Financial market conditions support high stock prices, with the Chicago Fed NFCI Index declining to -0.546 on October 3.

Chicago Fed National Financial Conditions Index

Bitcoin — our canary in the coal mine — retreated sharply to test support at 110K. Follow-through below 108K would warn of a significant contraction in financial market liquidity.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields are headed for another test of long-term support at 4.0%, shown on the weekly chart below.

10-Year Treasury Yield

Bond market guru Jim Bianco maintains that, with inflation “sticky” at 3.0%, a healthy yield curve would require the Fed to keep short-term rates 100 basis points higher at 4.0%, leaving little room for further cuts. He also warns that the 10-year should be another 100 basis points higher, at 5.0%.

The current trade war escalation will likely ensure the Fed cuts below 4.0%, raising the specter of a steep rise in inflation.

Consumers

The University of Michigan survey reports declining consumer sentiment in October, reaching lows not seen since the pandemic.

University of Michigan: Consumer Sentiment

Perceptions of current economic conditions are lower than when President Biden left office, leaving the GOP House majority at risk in the 2026 midterms.

University of Michigan: Current Economic Conditions

Consumer expectations have plunged to similar lows.

University of Michigan: Consumer Expectations

Expected price increases have moderated in recent months, but remain high at 4.6% p.a.

University of Michigan: 1-Year Inflation Expectations

Long-term expectations, likewise, are a high 3.7%, well above the Fed’s 2.0% target.

University of Michigan: 5-Year Inflation Expectations

Dollar & Gold

The US Dollar Index continues to test long-term support at 98, as shown in the weekly chart below. A breach would confirm our long-term target of 90.

Dollar Index

Gold retraced to test its new support level after reaching our target of $4,000 per ounce almost three months ahead of schedule. Escalating trade tensions with China sparked another rally, and follow-through above recent highs would signal a fresh advance, with a target of $4,250.

Spot Gold

Silver is more volatile, and tall shadows at $50 per ounce signal profit-taking and increase the likelihood of a correction.

Spot Silver

Energy

Nymex WTI Light Crude broke support at $60 per barrel in response to trade war fears.

Nymex WTI Crude

Crude prices below $60 per barrel squeeze shale producers’ margins and threaten US crude production as unproductive wells are closed. The Baker Hughes US oil rig count slipped to 418 from 422 last week.

Baker Hughes US Oil Rig Count

Base Metals

The Dow Jones Industrial Metals index ($BIM) fell sharply on the weekly chart below, warning of a correction in copper, aluminum, and other base metals, anticipating a fall in demand as the US-China trade war escalates.

Dow Jones Industrial Metals Index ($BIM)

Conclusion

Escalating geopolitical and trade tensions threaten to destabilize an already fragile global economy, with precarious fiscal debt levels and stubborn inflation. We anticipate low growth and high inflation and maintain our overweight position in gold and defensive stocks. We are underweight high-multiple technology stocks and avoid exposure to long-term bonds.

The US and China are caught in what is now known as a Thucydides trap. Ancient Greek historian Thucydides recorded the collision of an established hegemon, Athens, and a rising challenger, Sparta, and concluded that war was inevitable. Nowadays, with nuclear-armed adversaries, war seems unlikely. Instead, we will likely see a trade war with the two flexing their economic muscle to secure a dominant position in the global economic order. The US still has a strong military advantage, but China enjoys a similar advantage in industrial capacity. China presently has the upper hand because its leadership is more strategic, while President Trump is more transactional. However, the eventual outcome is uncertain, and we recommend a strong defensive posture to weather the fallout.

We expect increased fiscal spending, suppression of interest rates, and high inflation as the inevitable consequences of war.

The rise of gold and decline of US Treasuries as the global reserve asset will likely continue as tensions escalate in the decades ahead.

Acknowledgments

Posted on

A government shutdown + declining consumer confidence

Key Points

  • The US government shut down most operations on Wednesday as Congress failed to reach a deal to raise the debt ceiling.
  • Government shutdowns do not usually have a lasting effect on financial markets, but the fiercely divided House threatens a bitter standoff.
  • Declining consumer confidence and further signs of a weakening labor market will likely contribute to a slowing economy.

The Conference Board’s measure of consumer confidence declined to 94.2, remaining at 2020 pandemic levels since a steep plunge in April 2025.

Conference Board: Consumer Confidence

Labor Market

Signs of a weakening jobs market are growing, with unemployment rising above job openings in August, for the first time since April 2021.

Job Openings

Temporary employment declined to 2.5 million. Low temporary hires indicate declining employer confidence in the economic outlook.

Temporary Employment

Declining average weekly hours worked warn of increased layoffs in the months ahead.

Average Weekly Hours

A low quit rate of 1.9% reflects declining employee confidence in the job market.

Quit Rate

Stocks

The S&P 500 continues to test resistance at 6700 despite concerns over the government shutdown. A breakout would offer a medium-term target of 6900.

S&P 500

Financial Markets

High-yield spreads remain at a low 7.5%, indicating credit is readily available in financial markets.

Junk Bond Spreads

Bitcoin is more tentative, having twice tested support at 110K. A breach of the support level would warn of a sharp contraction in financial market liquidity.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields will likely retest resistance at 4.2% in the next few days, driven by uncertainty from the government shutdown. A breakout above 4.2% would offer a medium-term target of 4.4%.

10-Year Treasury Yield

Dollar & Gold

The US Dollar Index retreated below support at 98, but the outlook for lower interest rates remains uncertain.

Dollar Index

Gold climbed to $3,868 per ounce, demand fueled by the increased uncertainty. A breakout above $3,900 would signal a test of our year-end target of $4,000.

Spot Gold

Silver ripped through our target of $45 per ounce, with rising Trend Index troughs signaling strong buying pressure. A breakout above resistance at $47 would offer a target of $50.

Spot Silver

Platinum has re-joined the party, with a breakout above $1,500 offering a target of $1,700.

Platinum

Conclusion

Uncertainty over the US government shutdown has boosted demand for precious metals. Resolving partisan differences over government funding and extending healthcare benefits will likely prove difficult.

Consumer confidence is low, and a weakening labor market warns of a slowing economy. An extended shutdown would further undermine spending, pushing the economy closer to a recession.

Strong financial market liquidity supports high stock prices, but a Bitcoin retreat below 110K would warn of a contraction that would hurt equity markets.

Acknowledgments

Posted on

Powell walks the tightrope with the latest FOMC decision

Key Points

    • The Fed cut rates by 25 basis points, with two more expected this year.
    • There is no change to the rate of Fed balance sheet runoff (QT).
    • FOMC dot plot projections reflect a mildly dovish long-run monetary policy, but not sufficient to antagonize the bond market.

Chair Jerome Powell announced a 25 basis-point cut in the fed funds target rate. The Target range for the federal funds rate is now 4.0%-4.25%.

There was only one dissent, from new Trump appointee Stephen Miran, who wanted a 50 basis point cut.

What’s new in the FOMC statement:

Recent indicators suggest that growth of economic activity moderated in the first half of the year.

Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.

FOMC economic projections reflect a broadly balanced economy, with unemployment rising slightly to 4.5% before easing to 4.2% in the long run. Real GDP growth is expected to slow to 1.6% in 2025, increasing to 1.8% in the long run. Median PCE inflation is projected to remain at 3.0% for 2025 before easing to 2.0% in the long run.

FOMC Projections

Dot Plot projections of the fed funds rate center around another two rate cuts of 25 basis points this year, with one outlier — possibly Miran — projecting five rate cuts.

Fed Funds Rate Projections (the Dot Plot)

Financial Markets

Financial markets already display signs of loose monetary conditions, with the Chicago Fed NFCI index falling to -0.558 for the week ended September 5.

Chicago Fed National Financial Conditions Index

Treasury Markets

10-year Treasury yields rallied off support at 4.0% on a less-dovish-than-expected FOMC projection.

10-Year Treasury Yield

Dollar & Gold

The US Dollar Index likewise found support on the prospect of higher-than-expected interest rates.

Dollar Index

Gold retraced to test support at $3,650 per ounce.

Spot Gold

Conclusion

The Fed cut 25 basis points as expected, with Chair Jerome Powell doing just enough to placate President Trump without caving to political pressure.

Dot plot projections reflect two more rate cuts of 25 basis points this year. The median fed funds rate of 3.0% is slightly higher than expected long-run inflation at 2.0%. The resulting real fed funds rate of 1.0% is somewhat dovish but not outright stimulatory. The Trump administration wants to run the economy hot, with higher inflation, to solve the fiscal debt crisis. At the same time, a negative real rate would antagonize the bond market and likely cause an upsurge in long-term yields.

Fed Chair Powell has skillfully negotiated a path between the bond market preference for higher real rates and the Trump administration’s demands for monetary stimulus. Antagonizing either group would risk a bond market revolt, the latter because it would invite increased Trump interference and possible dismissal of Powell “without cause.”

We do not expect the outcome to affect the secular uptrend in long-term Treasury yields, the dollar’s downtrend, or gold’s uptrend.

Acknowledgments

Posted on

Stay out of Tech Stocks | Julian Brigden

Maggie Lake interviews Julian Brigden, co-founder of MI2 Partners, about his fears for tech stocks, the AI bubble, US exceptionalism, the telegraphed rate cuts, and why people are ignoring hard asset outperformance.

[Length: 38:00]

Here is the XLK (S&P Technology SPDR) relative to XME (S&P Metals & Mining SPDR) that Julian refers to:

S&P Technology SPDR/S&P Metals & Mining SPDR

Posted on

Douglas Holtz-Eakin on Tariffs

Douglas Holtz-Eakin was Director of the Congressional Budget Office and Chief Economist of the Council of Economic Advisers under George Bush. His view on tariffs is that they are a tax paid by US corporations and consumers, and if you raise taxes, growth will suffer.

[Length: 6:30]

Posted on

Bond yields and the dollar fall as gold reaches a new high

Key Points

  • Long-term Treasury yields are falling steeply in anticipation of more Fed rate cuts as the economy slows.
  • The S&P 500 is retracing to test short-term support at 6500.
  • Financial market liquidity remains strong, supporting stocks.
  • The dollar is weakening, and gold and silver soared to new highs.

10-year Treasury yields fell to 4.046% testing the long-term band of support between 4.0% and 4.1%.

10-Year Treasury Yield

Expectations of steeper Fed rate cuts grow as more evidence emerges of a slowing economy. The Cass Freight Index is in a strong downtrend, and a fall below 1.0 would signal a recession. A useful barometer of economic activity, the index measures the number and cost of freight shipments across North America based on data from hundreds of large shippers.

Cass Freight Index

The current turmoil over tariffs — after the US Appeals court overruled Donald Trump’s “reciprocal” tariffs and his earlier “fentanyl” tariffs against China, Canada, and Mexico — will likely cause a sharp contraction in capital investment due to the uncertainty, almost guaranteeing a recession. Trump has lodged an appeal with the Supreme Court, but a decision is unlikely before next year. Unless he can get a stay on the lower court’s ruling, Treasury will be forced to fund the billions of dollars in tariffs collected.

While some believe that overturning the tariffs would cause a blowout in the fiscal deficit, we believe that the promise of a boost in revenue from tariffs was more spin than substance. There are no free lunches in economics; when something looks too good to be true, it usually is. Most of the cost of tariffs is currently borne by US corporations, but will likely be pushed onto consumers through price increases over the next year.

Goldman Sachs: Estimated Incidence of Tariff Costs

Where corporations do not pass on tariffs to customers, their profits and corporate tax paid to the Treasury will decline. Falling profits also hurt stock prices, reducing capital gains taxes. US consumers and corporations will directly or indirectly pay for the tariffs, and the impact on net Treasury receipts will likely be marginal.

Our biggest concern is not the loss of tax revenues, but the economic impact of policy uncertainty.

Stocks

The S&P 500 is retracing to test its latest support level at 6500, but rising Trend Index troughs indicate buying pressure, and respect of support will likely signal a further advance.

S&P 500

The equal-weighted S&P 500 ($IQX), more representative of large caps than the headline index, tests similar support at 7600. Rising Trend Index troughs again indicate buying support and likely continuation of the uptrend.

S&P 500 Equal-Weighted Index

Financial Markets

High-yield bond spreads are declining, indicating the return of loose financial conditions supporting high stock prices.

Junk Bond Spreads

Bitcoin (BTC) respected support at 110K, further indicating easing financial conditions — a bullish sign for stocks.

Bitcoin (BTC)

Dollar & Gold

The dollar is weakening in line with the outlook for interest rates. A US Dollar index breach of the long-term band of support between 96.5 and 97 would strengthen our long-term target of 90.

Dollar Index

Gold closed at a new high of $3,645 per ounce, while rising Trend Index troughs signal buying pressure. Expect a retracement to test support between $3,500 and $3,600, but respect will likely confirm an advance to $4,000 by the end of the year, as the dollar weakens.

Spot Gold

Silver is testing resistance at $41.50 per ounce. Again, we expect a retracement followed by a further advance, with a target of $44.

Spot Silver

Energy

Brent crude held steady at close to $66 per barrel after the OPEC+ meeting on the weekend decided on a smaller-than-expected initial increase in production of 137,000 barrels per day, in a phased unwinding of the 1.66 million barrels per day post-COVID production cut.

Brent Crude

Conclusion

Cyclical pressures are driving long-term yields lower, with a slowing economy likely to cause steeper-than-expected Fed rate cuts. Added uncertainty over tariffs increases the risk of a recession.

Loose financial conditions, boosted by falling Treasury yields, support stock prices, but a slowing economy would be bearish for earnings.

The dollar is weakening in response to the expected fall in interest rates, and a US Dollar Index breach of support between 96.5 and 97 would strengthen our long-term target of 90.

We expect gold and silver to rise as the dollar weakens, with respective targets of $4,000 and $44 per ounce by the end of the year.

 

Acknowledgments

Posted on

Weak jobs and falling crude = September rate cut

Key Points

  • The Fed will likely cut interest rates in September after a weak jobs report.
  • Falling crude oil prices also ease inflationary pressure.
  • Long-term Treasury yields fall, anticipating a rate cut.
  • The dollar weakened as yields softened, while gold soared to a new high of $3,600 per ounce.

The August labor report disappointed with a low 22,000 job growth compared to an expected 75,000. Another June data revision saw jobs contract by 13,000, after initial reported gains of 147,000 were revised down to 14,000 last month.

Employment Growth

Growth in total weekly hours worked came to a complete halt in August, with annual growth falling to 0.7%. Real GDP growth will likely follow.

Total Hours Worked

The uptrend in continued claims confirms the August rise in the unemployment rate to 4.3%.

Unemployment

The unemployment level ( 7.4m ) now exceeds job openings ( 7.2m ), but only by 200K.

Job Openings

Temporary jobs fell to 2.5 million, a level typically seen during recessions.

Temporary Employment

Layoffs and discharges are in an uptrend.

Layoffs & Discharges Rate

The 2.0% quit rate indicates that employees are no longer confident in finding new jobs.

Quit Rate

Average hourly earnings growth slowed to an annualized rate of 3.3% in August, but year/year growth was steady at 3.9%, still indicating a balanced labor market.

Average Hourly Earnings

Crude Oil

OPEC+ has injected a lot of downside pricing risk into the oil markets this week, fueling speculation that the second wave of voluntary cuts totaling 1.65 million b/d could be unwound much quicker than previously expected. According to news reports, Saudi Arabia is interested in pushing ahead with the unwinding during the September 7 meeting, citing the need to regain market share. (OilPrice.com)

The move has the potential to create a massive oversupply. Brent crude fell to $65.50 per barrel on Friday, but if the Saudis succeed, expect a test of support at $60. Falling crude prices would squeeze shale producer margins, causing a drop in US production.

Brent Crude

Lower energy prices would ease inflationary pressures in the US, allowing more room for Fed rate cuts.

ISM Services

The ISM services PMI improved to 52% in August, indicating expansion.

ISM Services PMI

New orders jumped to 56%, signaling an improving outlook.

ISM Services New Orders

However, services employment signals contraction, confirming the weak labor report.

ISM Services Employment

A steep 69.2% for the prices sub-index also warns of strong inflationary pressures.

ISM Services Prices

Contracting employment and rising prices in the large services sector warn of stagflation. We expect the Fed to cut in September, but then pause to see how this affects prices.

Stocks

A weak labor report is a bearish sign for stocks despite the prospect of a Fed rate cut. A reversal of the S&P 500 below support at 6400 would warn of a correction.

S&P 500

We expect the Dow Jones Industrial Average to test support at 45,000. Respect of support would confirm another advance. A breach is less likely, but would signal a test of 44,000.

Dow Jones Industrial Average

Financial Markets

The Chicago Fed Index retreated to -0.526, warning that financial conditions are tightening.

Chicago Fed National Financial Conditions Index

Tighter financial conditions are also highlighted by a decline in bank reserves to below $3.2 trillion.

Commercial Bank Reserves at the Fed

Bitcoin is testing support at 110K. A breach would warn of a swing to risk-off in financial markets, which would be bearish for stocks.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields plunged to 4.09%, heading for a test of long-term support at 4.0% as speculators pile into bonds ahead of the expected September rate cut. However, we have warned of the risk that long-term yields rise in response to a Fed cut — as in September last year.

10-Year Treasury Yield

Dollar & Gold

The dollar weakened in response to the poor jobs report, anticipating falling interest rates.

Dollar Index

Gold surged to a new high at $3,600 per ounce before closing at $3,587. Expect another test of support at $3,500, but respect will likely confirm another advance — and our year-end target of $4,000.

Spot Gold

Silver is retracing to test support at $40, but respect will likely confirm another advance and a target of $44.

Spot Silver

Conclusion

Weak jobs growth in August warns that economic growth is slowing, but the ISM services report warns of strong price pressures in the services sector. We expect a Fed rate cut in September but then a pause as the Fed remains wary of stagflation, with low growth and rising prices.

We expect the dollar to weaken in response to rate cuts, with gold and silver soaring to new highs.

The Fed should take care to avoid a repeat of last September, when Fed rate cuts sparked a sell-off in long-term Treasuries, signaling the bond market’s displeasure with monetary and fiscal policy. We believe they will aim for a gradual decline, with a pause after the September cut to assess the impact of tariffs and a slowing economy on prices.

A Saudi move to increase crude oil production would likely drive Brent crude to $60 per barrel or below, giving the Fed more room to cut rates.

Acknowledgments

Posted on

Truckers anticipate a slowdown

Key Points

  • The weekly Bull/Bear market indicator for the US declined to 40% on a further drop in heavy truck sales
  • The US decline also affected the ASX indicator, which fell to 56%
  • Long-term Treasury yields and the dollar are weakening, boosting support for gold

Bull/Bear Market Indicator

US Bull/Bear Market

The Bull/Bear indicator declined to 40% from 60% on Friday, with heavy truck sales signaling risk-off:

Bull-Bear Market Indicator

Heavy truck sales declined to 37.1K units in July, with the 12-month moving average falling to 38.6K. Heavy truck sales are a reliable indicator of transport activity and confidence in the economic outlook. Decline of the 12-month MA by more than 10% from its October 2023 peak at 43K signals risk-off.

Heavy Truck Sales (Units)

The fall also affected the Australian indicator, which slipped to 56% from 64% last Friday, indicating a mild bear market.

Bull-Bear Market Indicator

The decline is due to the US index’s 40% weighting in the ASX Bull/Bear indicator.

ASX Bull-Bear Market Indicator

Stocks

The S&P 500 recovered from Tuesday’s fall, but the declining Trend Index warns of weak sentiment.

S&P 500

The Dow Jones Industrial Average stalled at 44K and has not yet confirmed the S&P 500 bull market signal with a breakout above 45K. Again, declining Trend Index peaks warn of bearish sentiment.

Dow Jones Industrial Average

Financial Markets

Strong liquidity in financial markets supports stocks. The Chicago Fed National Financial Conditions Index remains in a strong downtrend, indicating loose monetary conditions, despite an upturn to -0.535 from -0.565 last week.

Chicago Fed National Financial Conditions Index

Bitcoin remains in an uptrend, indicating bullish sentiment, closely correlating with financial market liquidity.

Bitcoin (BTC)

Treasury Markets

Long-term Treasury yields remain weak, testing support at 4.2%, but this is a bear signal, anticipating Fed rate cuts in response to a slowing economy.

10-Year Treasury Yield

Dollar & Gold

The Dollar Index also weakened, with the Fed expected to cut rates. The decline is headed for a test of support at 97.

Dollar Index

However, a narrowing trade deficit would reduce the supply of dollars in international markets as international borrowers and importers need to meet dollar-denominated commitments. The Fed would normally alleviate the shortfall by issuing swap lines to foreign central banks, but we live in an uncertain world. The US Treasury could object to the Fed’s accommodation if the mood takes them.

BEA: Trade Deficit

Gold benefited from dollar weakness in the last few days. Narrow consolidation above support at $3,360 per ounce is a bullish sign, and a breakout would signal a fresh test of recent highs.

Spot Gold

Gold Revaluation

The Bitcoin Reserve Act Bill is currently circulating in Congress. Its stated aims:

To establish a Strategic Bitcoin Reserve and other programs to ensure the transparent management of Bitcoin holdings of the Federal Government, to offset costs utilizing certain resources of the Federal Reserve System, and for other purposes.

Section 9 includes a provision to revalue US gold reserves. Treasury owns the gold and issues gold certificates to the Fed, currently at a book value of $42.222 per troy ounce.

The Bill proposes that the Treasury revalue its gold holdings and issue new certificates in exchange for the existing ones held by the Fed. The Fed will credit the difference in value between the new and old certificates to the Treasury General Account (TGA) on its balance sheet. The result is inflationary as the Treasury can use the credit to buy Bitcoin, repay debt, or otherwise spend as Congress directs.

According to Fiscal Data, the US Mint holds 7,628 metric tons of gold in deep storage at Fort Knox, Denver, and West Point. Revaluing by $1,000 per ounce would enable a credit of $245 billion to the TGA. While not exactly earth-moving, the Bill provision highlights how Treasury could benefit from a higher gold price.

Conclusion

Heavy truck sales are the latest sign that US economic growth is slowing.

Long-term Treasury yields are weakening, and so is the dollar. Demand for gold has strengthened, and a follow-through above the last few days’ consolidation would signal a re-test of recent highs above $3,400 per ounce.

Acknowledgments

Posted on

Weak labor report hammers stocks

Key Points

  • The S&P 500 and Dow fell sharply on the poor July jobs report
  • Financial markets warn of easy credit conditions, which could lead to markets mispricing risk
  • Real GDP growth is misleading due to the buildup of inventories in Q1, ahead of tariffs, and their subsequent rundown in Q2
  • Long-term Treasury yields fell, and the dollar weakened, anticipating lower interest rates
  • The fall boosted demand for gold

July payrolls increased by 73K, below the estimate of 104K, but big downward revisions to the previous two months spooked investors. A combined revision of -258K to May and June employment lowered job gains to 19K and 14K, respectively.

Employment Growth

Stocks were hammered, with the S&P 500 displaying a bearish engulfing on the weekly chart. Breach of support at 6200 would signal a correction to test 6000.

S&P 500

The Dow Jones Industrial Average failed to confirm the S&P 500 bull market signal and has now broken support at 44K, warning of a correction to 42 K.

Dow Jones Industrial Average

Financial Markets

The Chicago Fed National Financial Conditions Index warns of further easing with a fall to -0.57, signaling loose monetary conditions similar to 2021 during the COVID pandemic.

Chicago Fed National Financial Conditions Index

During the week, we highlighted the risk of a credit bubble if super-easy financial conditions persist:

Looser monetary policy would accelerate credit growth (light blue) above the nominal GDP rate (dark blue), leading to malinvestment as in the credit bubble preceding the 2008 global financial crisis. Mispricing risk feeds instability, leading to an inevitable collapse when assets reprice.

Bank Credit & Nominal GDP Growth

Bond market guru Jim Grant today confirmed the worrying speculative bonanza:

It’s a speculative-credit bonanza. Freewheeling conditions in the primary market pushed leveraged loan activity to new heights in July, with domestic new issuance reaching $223.2 billion. That’s the largest one-month total on record, comfortably topping the prior $206 billion peak established in January….

“I haven’t seen a market quite like this post the Great Financial Crisis,” Jon Poglitsch, managing director at Sycamore Tree Capital Partners, marveled to Bloomberg Wednesday. There’s a “grab for spread where anyone can find it,” he noted.

Loose financial conditions will likely be exacerbated if the Fed caves to political pressure and cuts interest rates, risking a credit bubble.

Treasury Markets

The weak jobs report swept aside concerns over the uptick in June core PCE inflation to 2.8%.

PCE & Core PCE

10-year Treasury yields plunged, anticipating Fed rate cuts, testing long-term support at 4.2%.

10-Year Treasury Yield

Economy

Real GDP growth recovered to an annualized rate of 2.9% in Q2, but the numbers are misleading. The biggest contributor was a sharp reduction in inventories after massive Q1 pre-orders, front-running the tariffs announced by President Trump in April. The contraction in Q2 aggregate hours worked reveals a far gloomier picture.

Real GDP & Total Hours Worked

A 50K July decline in employment in cyclical sectors — manufacturing, construction, transportation, and warehousing — warns that the economy is slowing.

Cyclical Employment

Labor Market

Job openings and unemployment remain in balance, as highlighted by Chair Powell at this week’s FOMC announcement.

Job Openings

Annual growth in average hourly earnings at 3.9% reflects reasonable labor demand.

Average Hourly Earnings

Dollar & Gold

The US Dollar Index fell sharply on the July jobs report, anticipating lower interest rates ahead.

Dollar Index

The fall boosted demand for gold, which is testing resistance at $3,360 per ounce. Breakout would signal a test of $3,440.

Spot Gold

Conclusion

A weak jobs report, with falling employment in cyclical sectors, warns that the economy is slowing. Stocks are expected to undergo a correction, with the S&P 500 testing support at 6000 and the Dow testing 42K.

Interest rates are expected to fall, with the Fed cutting rates to create a soft landing. Lower interest rate expectations have also weakened the dollar and boosted demand for gold.

Easy credit conditions increase the risk of a credit bubble, which could lead to investors mispricing risk.

We are underweight stocks except for defensive sectors, and overweight cash, gold, and short-term financial assets.

Acknowledgments

Posted on

S&P 500 weakens and gold rallies

Key Points

  • The S&P 500 closed above 6300 for the first time, supported by strong liquidity
  • But declining Trend Index peaks warn of a retracement
  • Consumer Confidence remains weak, and the Conference Board Leading Economic Index signals a recession
  • Gold and silver rallied as the dollar weakened

The S&P 500 closed above 6300 for the first time, but declining Trend Index peaks warn of selling pressure. Expect retracement to test support at 6100.

S&P 500

The Dow Jones Industrial Average also signals weakness, with declining Trend Index peaks indicating selling pressure.

Dow Jones Industrial Average

The Broad DJ US Index (red) has underperformed the DJ World ex-US index (blue) over the past six months.

DJ US Index ($DJUS) & DJ World ex-US ($W2DOW)

Financial Markets

Financial markets grow increasingly supportive, with the Chicago Fed National Financial Conditions Index (NFCI) declining to -0.54. Values above zero are considered restrictive.

Chicago Fed National Financial Conditions Index

Bitcoin has retraced slightly from resistance at $120K, but still signals bullish market conditions.

Bitcoin (BTC)

Treasury Markets

10-Year Treasury yields declined to 4.35%, but rising Trend Index troughs signal continued buying pressure.

10-Year Treasury Yield

Economy

Consumer confidence remains low, with the Conference Board index declining by 5 points to 93, similar to levels during the 2020 pandemic.

June’s retreat in confidence was shared by all age groups and almost all income groups. It was also shared across all political affiliations, with the largest decline among Republicans.

Conference Board: Consumer Confidence

The Conference Board’s Leading Economic Index (LEI) declined to 99.8% in June. Six-month growth in the LEI (blue) fell to an annualized -5.6%, below the -4.1% that signals a recession (marked in red).

Conference Board Leading Economic Index - Recession Signals

The black line on the above chart indicates negative growth in more than 50% of the LEI components below over the past six months. A broad decline confirms the recession signal.

Conference Board Leading Economic Index - Components

Dollar & Gold

The Dollar Index retreated below support at 98, signaling another decline. A breach of support of 96.50 would strengthen our long-term target of 90.

Dollar Index

Gold rallied to test resistance at $3,400 per ounce. A breakout above $3,400 would offer an immediate target of $3,500 and strengthen our year-end target of $4,000.

Spot Gold

Silver is testing resistance at $39 per ounce. A breakout would offer a target of $42, but declining Trend Index peaks warn of stubborn resistance.

Spot Silver

Conclusion

The S&P 500 closed at a new high, but declining Trend Index peaks warn of selling pressure.

The Dow Industrial Average respected resistance at 45,000, failing to confirm the S&P 500 bull market signal.

Financial market conditions indicate strong liquidity, but consumer confidence is weak, and the Conference Board Leading Economic Index signals a recession.

The US Dollar Index retreated below support at 98, triggering a rally in gold and silver. A gold breakout above $3,400 would offer an immediate target of $3,500 and strengthen our year-end target of $4,000. A silver breakout above $39 would offer a target of $42, but declining Trend Index peaks warn of stubborn resistance.

Acknowledgments

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