Key Points
- Economic activity is contracting. The Cass Freight Shipments index signals a recession.
- Bitcoin warns of a sharp contraction in financial market liquidity, which is likely to affect stock prices.
The Cass Freight Shipments (seasonally adjusted) Index declined to 0.984, a level typically associated with recession.
The decline confirms the earlier signal from our leading indicator.
A year-on-year decline of more than 2.0% in the 12-month moving average of the unadjusted Cass Freight Shipments Index provides a leading indicator of recessions.
Financial Markets
Bitcoin continues to decline, warning of a sharp contraction in financial market liquidity that will likely affect stock prices.
The secured overnight funding rate (SOFR) increased to the Fed’s standing repo facility rate (blue dashes below), which is now 4.0%. The higher SOFR rate indicates that the repo market is having to pay a premium over the rate paid on reserve balances (pink) to attract sufficient funding from commercial banks.
When monetary conditions are looser, the repo market is primarily funded by money market funds, which are prepared to accept a lower rate than the IORB, only offered by the Fed to commercial banks.
Stocks
The S&P 500 rallied after a gap down at the open, but was unable to hold onto gains.
Treasury Markets
10-year Treasury yields shot up to 4.15%, suggesting that the prospects of a December rate cut are again fading.
Rising long-term rates caused a pull-back in gold and silver. We expect gold to retest support between $3,900 and $4,000 per ounce, but respect will likely indicate another test of $4,400.
Silver is similarly retracing to test support between 50 and 46.
Conclusion
The Cass Freight Index recession signal reinforces last week’s warning from the Freightwaves CEO of a crisis in the long-haul freight industry.
The sharp contraction in financial market liquidity risks a correction in stock prices.
Gold and silver pulled back on a rally in long-term interest rates, but we remain bullish on their long-term prospects.
Acknowledgments
- CoinDesk: Bitcoin
- Federal Reserve of St Louis: FRED Data
- Cass Information Systems: The Cass Freight Index
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.