Very Interesting/Confusing Markets!

Friends

Stocks fell early and often today after the government PPI report indicated that inflation is hotter than possibly the Fed expected. But the most fascinating part of the story is not that stocks fell, but that bond yields also fell (bond prices rising). Typically a hotter than expected inflation report would be met with a rise in interest rates as bond holders, expecting the Fed would have to fight rising inflation with higher rates, would be selling their longer maturities. Indeed, rates have fallen for most of the year with the 10 year Treasury note’s yield falling from 3% to near 2.5% YTD. Something doesn’t add up here. If inflation is a problem, stoked by a pickup in the economy, then bond yields should be rising. Does the bond market know something that the stock market doesn’t ‘know? Something will have to give eventually.

As for today, the Dow Jones Industrial Average was down 101 points to close at 16,613. The S&P 500 was down 8 to finish the day at 1888. Gold was up (at least that kind of makes sense) $11 to trade at $1306 per ounce, while oil was up $.44 to trade at $102.14 per barrel WTI.

In addition to the hotter than expected PPI report, the bears were emboldened by the fact the bulls could not get the S&P through the 1900 level yesterday. As mentioned over the past few weeks, neither the bulls nor the bears have been able to break away from the tight trading range we have seen in the early part of 2014. It will be interesting to see how this conundrum resolves itself, and just when it will resolve itself. The bond market and the stock market are telling different stories. Or are they? Perhaps the types of stocks that have been going up recently are telling the same story as the bond market.

Have a nice evening everyone.

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