Yesterday’s ten-year Treasury auction was an undeniable disaster that added to the anxiety that the perfect balance of financial engineering between central banks was falling apart.

• High Yield: 3.960%
• When Issued: 3.929%
• Bid to Cover: 2.32 six-month average 2.52%
• Dealers: 17.88 six-month average 15.5%
• Direct: 15.9% six-month average 17.1%
• Indirect: 66.2% six-month average 67.5%

The Price Tail Did all the buyers in an auction pay a similar price, or did some get the bonds on the cheap?  The price tail is the difference between the average price paid in an auction and the cut-off price (the lowest price at which a bond was bought in the auction).  A big price tail is seen as a negative.  Why?  Because the marginal buyer of the bond was only willing to pay a much lower price than the average. In Touch Capital Markets

Last year, as yields surged, the U.S. Treasuries became the hot “no-brainer” trade, and everyone took a piece of the action except the Federal Reserve, which has been on a mission to drain cash out of the economy. 

Individual investors of all sizes filled their absence:

• Warren Buffet: T-bills holding $234 billion
• Federal Reserve: T-bills holdings $195 billion

However, yesterday’s auction was a struggle, pushing the “tail” to 3.1 basis points (bps). A significant part of the problem is non-stop issuance. Suddenly, the safest market is going “hat in hand” to seduce buyers. There is an old saying that there will always be buyers of U.S. government debt…at the right price.

What Else is Eating the Market?

The truth about yesterday's session, which saw major indices rocket out the gate only to fizzle like Roman candles on a summer night, is that selling began a lot earlier than the Treasury auction.

The S&P 500 stalled right at 10 am and it went downhill from there.

Cautious Tone

Investors found comfort in Utilities (XLU), Energy (XLE), Financials (XLF), and Consumer Staples (XLP).  Consumer Discretionary (XLY) pulled up the rear as autos took it on the chin, followed by consumer service.

Chip stocks edged higher out of the gate but turned lower. The only silver lining is volume, which is ebbing.

Still, there is nowhere to hide, especially in small-caps.

Bettors Fade

As former President Trump fades into the betting pool, so does the stock market.

I’m sure markets are unnerved by the revelation that Minnesota Governor Tim Walz has zero investments.

Market Breadth

The big red boxes speak for themselves. Semiconductors stumbled after the harsh reaction to Super Micro Computer Inc (SMCI).

Remember when this was one of the best starts ever?  It's quickly moving to ho-hum.

After the Close

It was hit-or-miss, as companies with hair on them posted financial results and saw their share price immediately destroyed:

• Jfrog (FROG): -28%
• Dutch Bros (BROS): -21%
• Bumble (BMBL): -27%
• Fastly (FSLY): -19%
• Workday (WDAY): -9%
• Applovin (APP): -9%

Several of the names are companies that have only been publicly traded for a few years, proving that Silicon Valley ripped off the public in unconscionable ways.

Today’s Session

Once again, the market is starting off with optimism that maybe there has been an overreaction to moves from the Bank of Japan (BOJ) and last Friday’s jobs report.

There is no doubt those dismissing recession out of hand are missing the point and risks, but the market won a major victory yesterday when the BOJ chimed in with a promise not to hike rates again.

But, there is no denying the slowing of the economy.

Most consumers are tapped out, which explains the decline in revolving credit in June.

The trend of slower credit card use is still in place according to the latest from Bank of America (BAC).

Credit card utilization is slowing (there is up to $4.0 trillion available) and the things we most frequently purchase with credit cards are seeing the most rapid price declines.

Cost to eat out at restaurants and local recreation are benefiting from a slide in travel especially abroad.

Americans always spend passed the official point of being tapped out, but now we are seeing that last source of purchasing power wane.  This trend coupled with more weakness in the labor market, which means slower wage growth, makes the economy more vulnerable to overall (official) recession.

Jobless Claims

Initial Jobless Claims came in at 233,000 from 249,000 and consensus of 240,000.  The bulls say this is proof the economy is strong.

Continuing claims, however, climbed to 1,875,000 from 1,870,000 and consensus of 1,869,000.  I think this is what moved equities higher and bonds lower.

Comments

It seems the reaction to the initial job claim numbers today, is nothing more than a tradeoff between the Fed-R needing to cut rates to avoid recession and perhaps masking a one week's number against the trend, there is a reason why unemployment numbers are average across 4 weeks. Be careful out there, not sure we are out of the woods just yet. Way too many moving parts involved here around making assumptions around the near-term market reactions. Terry Dowler on 8/8/2024 10:23:33 AM

Walz probably has a closet full of gold Cliff Copus on 8/8/2024 4:59:24 PM

Walz doesn't need to have any investments, he's got several large cash flows coming in from the taxpayers: a bloated pension from being a teacher, a bloated pension from being in Congress, and a bloated pension from being governor of Minnesota, plus he'll pull some money for being in the National Guard, even though he was a deserter. And payouts are 100% guaranteed, unlike the retirement funds for people who actually work for a living. Greg on 8/8/2024 11:19:32 PM

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