Category: GDP and Activity

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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

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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

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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

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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

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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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S&P 500 breakout but no buy signal

Summary

  • The S&P 500 and Nasdaq reached new highs, but the Dow has not yet confirmed the breakout
  • Liquidity is strong, and long-term Treasury yields are softening
  • But the Conference Board Leading Economic Index warns of a recession
  • The dollar keeps falling, and demand for gold remains strong, flagging high levels of uncertainty

The S&P 500 broke resistance at 6100 to reach a new high. Expect retracement to test the new support level, but respect will likely signal a fresh advance.

S&P 500

The Nasdaq 100 ETF (QQQ) has also reached a new high.

Invesco Nasdaq 100 ETF (QQQ)

However, the Dow Jones Industrial Average lags and has not yet confirmed the new breakout.

Dow Jones Industrial Average

The broad Dow Jones US Index (DJUS) still lags the DJ World-x-US Index (W2DOW).

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

Financial Markets

The Chicago Fed National Financial Conditions Index declined to -0.51 on June 20, signaling improving financial conditions.

Chicago Fed National Financial Conditions Index

10-year Treasury yields declined to 4.25%, providing further support for stocks.

10-Year Treasury Yield

Economy

The Conference Board’s leading economic index (LEI) declined to 99.0% in May. Six-month growth in the LEI (blue) fell to an annualized -5.4%, below the -4.1% that triggers a recession signal (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 over the past six months, which confirms the recession signal.

Conference Board Leading Economic Index - Components

Manufacturers’ new orders, excluding defense and aircraft, are one of the few LEI components that did not decline over the past 6 months. However, they show a steep long-term downtrend when adjusted for inflation (PPI for capital goods).

Manufacturing New Orders: Non-Defense Capital Goods Excluding Aircraft/PPI for Capital Equipment

New orders for consumer goods, adjusted by CPI, are also declining.

Manufacturing New Orders: Consumer Goods/CPI

Dollar & Gold

The dollar continues to weaken, with the US Dollar Index breaking support at 98 to confirm our target of 90.

Dollar Index

Gold is consolidating between $3,200 and $3,400 per ounce. Declining Trend Index peaks warn of secondary selling pressure, and another test of support at $3,200 is likely. Respect of support would signal another test of resistance at $3,500.

Spot Gold

Silver is consolidating in a narrow pennant at $36 per ounce. A retracement to test the new support level at $34 remains likely, but follow-through above $37 would signal another advance.

Spot Silver

Conclusion

A breakout of the Dow Jones Industrial Average above 45K would signal another advance for stocks, but the Conference Board Leading Economic Index warns of a recession. Manufacturers’ new orders for non-defense capital goods and consumer goods both display long-term weakness.

10-year Treasury yields softened to 4.25%, and financial conditions are easing, supporting stock prices. However, a declining dollar and strong gold price continue to warn of uncertainty. We don’t see this as a buy opportunity for investors; extreme stock valuation levels continue to warn of elevated risk of a significant drawdown.

Acknowledgments

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Australian Jobs versus Rate Cuts

The RBA is expected to cut interest rates by 50 basis points next week, with a further 25 basis points in June, according to the NAB economics team.

CPI declined to a low annual rate of 2.4% in the first quarter, well within the RBA’s target range. However, the rate jumped to 0.9% (3.6% annualized) in the latest quarter.

Australian CPI - Quarterly & Annual

While this gives the RBA some leeway, the labor market remains strong, warning of the dangers of cutting too early.

Unemployment is a healthy 4.1%.

Australia: Unemployment

Employment continues in a strong uptrend.

Australia: Employment

The wage price index reversed its recent decline, rising by 3.4% over the past 12 months, while the quarterly rate increased to 0.9% (3.6% annualized), signaling underlying inflationary pressure.

Australia: Wage Price Index

However, monthly hours worked dipped slightly, with the monthly trend falling by 0.1%, warning of a slowdown ahead.

Australia: Aggregate Monthly Hours Worked

Business confidence is also weak. NAN April business confidence remains below zero, while current business conditions are steadily declining.

NAB Business Confidence & Conditions

Cash flows are suffering, according to the NAB business survey, falling to their lowest level since 2020.

NAB Business Cashflow

Forward orders have been contracting since 2023.

NAB Business Forward Orders

The slowdown has affected the retail and wholesale industries the most, but mining and transport & utilities show the steepest monthly declines.

NAB Business Forward Orders by Industry

Declining capital expenditure warns of an economic contraction and slowing growth ahead.

NAB Business Capital Expenditure

Conclusion

The Australian economy is gradually slowing, but unemployment remains low, leaving the RBA with a difficult choice: cut rates in anticipation that unemployment will rise, or wait for the actual data? We would argue that they should hold firm while unemployment is low, but that seems to be a minority view.

Acknowledgments

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ASX Weekly Market Snapshot

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 54%, with three of six leading indicators signaling risk-off, while the US bull-bear index (a 40% weighting) is at 60%:

Bull-Bear Market Indicator

The ASX 200 continues in a strong downtrend relative to the gold price in Australian Dollars.

ASX 200 Index Relative to Gold in AUD

The ASX 200 Financials Index (XFJ) is retracing to test resistance at 8500, but remains in a primary downtrend.

ASX 200 Financials Index

Stock Pricing

ASX stock pricing increased to the 76.18 percentile compared to 74.05 two weeks ago, and a high of 85.83 in February.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

The ASX bull-bear indicator at 54% indicates a mild bear market.

We are entering a bear market, and the risk of a significant drawdown is high.

Acknowledgments

Posted on

US Weekly Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

Our Bull/Bear Market indicator is unchanged at 60%, with two of the five leading indicators signaling risk-off:

Bull-Bear Market Indicator

We replaced the Coincident Economic Activity Index with Current Economic Conditions from the University of Michigan’s monthly consumer survey. The UOM index offers earlier recession warnings—when the 3-month moving average crosses below 100—and more timely updates.

University of Michigan: Current Economic Conditions

The current reading of 68.20 is a strong bear signal. The Fed Funds target rate is also in a bear cycle, but the two require confirmation from one of the following two indicators:

If the Chicago Fed Financial National Conditions Index rises above -0.40.

Chicago Fed National Financial Conditions Index

Or the S&P 500 30-week Smoothed Momentum crosses below zero.

S&P 500

Stock Pricing

Stock pricing eased slightly to the 95.67th percentile from a high of 97.79 six weeks ago. However, the extreme reading still warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

 

Conclusion

There’s little change this week. We are close to a bear market, with the bull-bear indicator at 60%. Stock pricing is still extreme, highlighting the risk of a significant drawdown.

Acknowledgments

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