Sunday, June 30, 2013

Stocks and Homes Fairly Valued (excerpt)

In a speech last Thursday, Governor Jerome Powell expressed some concern that QE “might drive excessive risk-taking or create bubbles in financial assets or housing.” He indicated that the Fed’s staff is closely monitoring valuation metrics in various asset markets.

Regarding the stock market, he said: “By most measures, equity valuations seem to be within a normal range. Whether one looks at trailing or forward price-to-earnings ratios, equity risk premiums, or option prices, there is little basis for arguing that markets show excessive optimism about future returns. Of course, in the equity markets there is always downside risk.” I tend to focus on forward P/Es, which suggest that stocks are neither cheap nor expensive.

As for home prices, Powell said that the Fed's staff tracks a model that compares them to rents. I tried to duplicate it by dividing the median existing home price by the tenant rent component of the CPI. My results come close to Powell’s statement on this subject: “At the peak of the bubble, house prices were more than 40 percent above their usual relationship to rents, according to one model that the Fed staff follows. At their trough, house prices had fallen about 10 percent below fair valuation. Given the price increases over the past year, they are--by the lights of this one model--moving back into the approximate neighborhood of fair valuation.”

On the other hand, Powell was concerned about excesses in the credit markets. He mentioned Governor Jeremy Stein’s speech on this issue earlier this year. He added, “These concerns have diminished somewhat as rates have risen since mid-May.”

Today's Morning Briefing: The Usual Suspects. (1) Opera or detective drama? (2) Lots of witnesses with different stories. (3) Nineteen photos on the story board. (4) Forsyth’s theory: Deflating asset bubbles. (5) Inconclusive evidence. (6) Fisher and Dudley on same page for a change. (7) Powell says equities and homes are fairly valued. (8) Powell agrees with Stein on credit excesses. (9) Stein clams up and recants. (10) The cover story covers all the bases. (11) Fed model says QE is a dud! (12) Flows vs. stocks. (13) The year’s winners and losers so far. (More for subscribers.)

Thursday, June 27, 2013

Earnings: Total vs. Per Share (excerpt)

Forward earnings for the S&P 500 rose to $117.09 per share during the week of June 20. It’s up from $112.99 at the end of last year. My target has been $118 for the end of this year. Industry analysts are currently estimating $123.65 for 2014. If that estimate doesn’t fall over the rest of the year, that will be the S&P 500’s forward earnings at the end of the year. I’ve been bullish on earnings, but not that bullish.

On the other hand, the four-quarter sum of the S&P 500’s net operating income has been flat over the past year through Q1-2013 around $900 billion. In the GDP accounts, cash-flow profits have also flattened over the past year around $1.5 trillion. Total corporate cash flow has done the same, around $2.0 trillion. However, both are at record highs.

When industry analysts listen to the earnings conference calls of the companies they follow, they’ve recently been hearing that revenues are slowing. They’ve also been hearing that managements plan to continue using excess cash flow to buy back shares and increase dividend payouts. When they put the specific numbers into their spread sheets, they get higher earnings per share as a result.

I track the divisors used by S&P to ensure that changes in shares outstanding, capital actions, and the addition or deletion of stocks to the index do not change the level of the index. They are rough proxies for the count of outstanding shares. Over the past 52 weeks through June 21, the divisors for the S&P 500, S&P 400, and S&P 600 are down 1.1%, 4.3%, and 2.3%, respectively. I suspect that corporations may not be buying back as many shares as they claim, and as analysts model in their spreadsheets.

In any event, although corporate cash flow has flattened along with corporate profits, it’s done so at a record high. There is plenty of it to drive stock prices higher. For the S&P 500, the sum of buybacks and dividends totaled $702 billion over the past four quarters through Q1-2013. Since the start of the bull market during Q1-2009, the sum total is a staggering $2.3 trillion.

Today's Morning Briefing: The Threepenny Opera. (1) A cast of 19 in the Fed’s opera. (2) They love to sing. (3) Writing the script during the live performance. (4) Dudley and Fisher agree on something. (5) Searching for a clear message. (6) Rising noise-to-signal ratio tends to depress P/Es. (7) Remarkably strong signal in forward earnings. (8) Shares are down for the count, so earnings are up per share. (9) Divisors as proxies. (10) Corporate cash flow still driving the bull. (More for subscribers.)

Wednesday, June 26, 2013

Emerging Markets & US Exports

There was no discussion of exports in Bernanke’s assessment of the economy during his press conference last Wednesday. They’ve stopped growing because global economic growth has been depressed by Europe’s recession.

Tightening global credit conditions and weakening commodity prices threaten also to depress emerging economies. How important are they to the US? More so than in the past, but not enough to hurt the US economy much at all. Total exports of goods and services account for 14% of nominal GDP. Merchandise exports to emerging economies account for 67% of total exports currently, up from about 50% in 1990. The good news is that US commodity imports have gotten cheaper.

Today's Morning Briefing: 'Undercurrent of Optimism' (1) Hilsenrath’s question. (2) Optimistic deputy is ready to terminate QE. (3) Fundamentals looking better. (4) Citigroup Economic Surprise Index turning up. (5) Will rising home prices trump rising mortgage rates? (6) Job gains boosting consumer confidence. (7) Capital spending trending higher along with profits. (8) Less fiscal drag from state and local governments. (9) Exports are a drag. (10) EMs matter, but not that much to US. (11) Three Fed tenors singing out of key. (12) Focus on overweight-rated S&P 500 Industrials. (More for subscribers.)

Tuesday, June 25, 2013

Gold & TIPS (excerpt)

The 10-year Treasury bond yield is up 91bps from this year’s low of 1.66% on May 2 to 2.57% yesterday, the highest since August 8, 2011. The selloff in the bond market was initially triggered by mounting concerns that the Fed would start to prepare an exit strategy from its ultra-easy monetary policy if the US economy continued to improve and the unemployment rate continued to fall. Those concerns were heightened during Fed Chairman Ben Bernanke’s congressional testimony on May 22. They were confirmed in his press conference on June 19.

The increase in the 10-year nominal Treasury yield has been surpassed by the 10-year TIPS yield, which is up 126bps from minus 0.62% on May 2 to 0.64% yesterday. This yield has been abnormally low (i.e., negative) since the fall of 2011. It seems to be in the process of normalizing back into a range of 1%-2%. 

Investors buy TIPS as a hedge against inflation. They buy gold for the same reason. So it isn’t surprising to see that the price of gold is highly correlated with the inverse of the TIPS yield. Nevertheless, this year’s free-fall in the price of gold is astonishing. It is also astonishing how well it predicted the jump in the TIPS yield.

Today's Morning Briefing: Great Liquidation? (1) Half right, half wrong. (2) Why are bonds so TIPSy? (3) An astonishing correlation between gold and TIPS yield. (4) Inflationary expectations still falling. (5) Normalization is painful for bond investors. (6) Global credit crunch again? (7) EMs getting crushed. (8) Another bearish article on China. (9) EMs matter more than ever. (10) Can America succeed as it did in the 1990s? (11) Forward earnings at yet another record high. (More for subscribers.)

Sunday, June 23, 2013

P/E Correction (excerpt)

That’s quite a worry list that piled up last week. It’s remarkable that the S&P 500 didn’t fall more than 2.1% last week. And so far, it is down just 4.6% from its May 21 record high. This decline is attributable to the drop in the S&P 500’s forward P/E from 14.4 on May 21 to 13.6 on Friday. S&P 500 forward earnings is actually at a record high.

How much more downside might there be in the valuation multiple? It depends on how much higher the bond yield might go. My assessment is that it could rise up to 3%, which would probably attract lots of buyers. If so, then the P/E might retest and find support at the 13 level, which would knock another 4.4% off the stock index from Friday's close. That would make for a 9.0% correction in the market from May 21.

Today's Morning Briefing: From Pain to Gain? (1) Litany of woes. (2) Another “endgame” correction followed by another relief rally? (3) Fed follies. (4) A world of troubles in China, Greece, Brazil, Turkey, and Syria. (5) Another global credit crunch? (6) Bond yields are getting interesting. (7) Retesting P/E of 13? (8) NZIRP will outlast QE. (9) Are central banks trapped? (10) Of mice and men. (11) Fed intent on taking air out of bubbles? (12) The long good buy. (13) This time, defensive stocks underperforming. (14) No place like home. (15) “Man of Steel” (+). (More for subscribers.)

Wednesday, June 19, 2013

Bond Investors Running for the Exits (excerpt)

In his press conference, Bernanke also specified, for the first time, that 7% is the jobless rate threshold that would mark a substantial improvement in the labor market. The Fed will start reducing its bond purchases later this year if this rate continues to fall toward 7% by the middle of next year, as anticipated by most of the members of the FOMC, according to Bernanke. So the good news is that the economic outlook looks a bit better, with fewer downside risks, according to the FOMC. The bad news is that the 10-year Treasury yield is now up 69bps from a low of 1.66% on May 2 to 2.35% yesterday. The 30-year mortgage yield is up 62bps over this period to 4.18%. The most immediate impact has been a sharp drop in mortgage refinancing activity. Another immediate impact is that retail bond investors are running for the exit doors as the Fed publicly lays out its exit strategy from ultra-easy monetary policy. The ICI reported huge estimated weekly net cash outflows from bond mutual funds of $13.5 billion during the week of June 12, following a $10.9 billion outflow the prior week. Unfortunately, those funds weren’t rotated into equity mutual funds, which had small net outflows totaling $2.0 billion those same two weeks. Today's Morning Briefing: Thresholds & Conundrums. (1) The smartest guys and gals in the room. (2) Fewer downside risks, unless you own bonds. (3) A promise is a promise with thresholds. (4) When unemployment rate falls to 6.5%, tightening talk will begin. (5) QE will be phased out by the time jobless rate falls to 7.0%. (6) Retail bond investors running for the exit doors. (7) Greenspan’s conundrum was falling bond yields. (8) Bernanke’s conundrum is rising bond yields. (9) Stocks on the sidelines while Fed and Bond Vigilantes duke it out. (10) A bad day for interest-rate sensitive stocks. (11) Oil demand growth shows slowing global economy. (12) Focus on underweight-rated S&P 500 Energy. (More for subscribers.)

Tuesday, June 18, 2013

S&P 500 Forward Earnings (excerpt)

The forward earnings of all three S&P market cap indexes rose to new record highs again last week. On a year-over-year basis, forward earnings for the S&P 500, S&P 400, and S&P 600 are up 5.0%, 7.7%, and 9.3%, respectively. That’s provided the underlying support for 22.8%, 28.0%, and 30.4% y/y gains in their comparable stock price indexes. Obviously, rising valuations accounted for most of the stock price gains over the past year. But those gains wouldn’t have happened if earnings had been decreasing instead of increasing.

Joe and I have been forecasting that S&P 500 forward earnings will rise to $118 a share by the end of this year, which is also our forecast for 2014’s earnings. However, forward earnings is already up to $116.84 during the week of June 13.

One note of caution: We are a bit surprised by the strength in forward earnings given the recent weakness in S&P 500 forward revenues. We monitor lots of domestic and global economic indicators that are highly correlated with S&P 500 revenues. The y/y growth rates of almost all of them are in the low single digits and seem to be heading toward zero. For example, US manufacturing and trade sales rose just 1.5% y/y during April.

Today's Morning Briefing: Much Ado About Not Much? (1) Is the market getting the Fed’s message? (2) NZIRP is “forever” more than QE. (3) Goodbye Ben. Hello Janet? (4) Stop the taper tantrum! (5) No summer crisis in Europe this year? (6) Bearish non-events are bullish. (7) Another record high for forward earnings. (8) Bouncing off the 50-dma. (9) Averting the fiscal cliff was bullish. (10) Not much fiscal drag after all. (11) Less stress in European banking system. (12) BRICs have a ton of problems. (13) Let’s Stay Home. (14) Focus on overweight-rated housing-related industries. (More for subscribers.)

Monday, June 17, 2013

GDP & the FOMC (excerpt)

At the March meeting of the FOMC, the central tendency of the members’ forecasts for real GDP was 2.3%-2.8% for this year and 2.9%-3.4% next year. Yesterday, Jon Hilsenrath predicted in a WSJ article: “If they maintain confidence in their economic forecasts, it could signal they think they're on track to begin pulling back the [QE] program later this year.”

Real GDP rose 2.4% (saar) during Q1-2013. At the March meeting of the FOMC, there was concern expressed about the impact of sequestration as “participants thought that fiscal policy was exerting significant near-term restraint on the economy.” The data show some weakness for Q2-2013, but probably not as much as was feared.

Real GDP is up 1.8% y/y through the first quarter. Excluding federal, state, and local government spending, it is up 2.7% y/y, and has been hovering around 3.0% since mid-2010. Inflation-adjusted core retail sales rose 4.3% y/y during May to another new record high. On the other hand, manufacturing production did weaken noticeably during April and May. That might reflect the impact of cuts in federal government spending that started on March 1.

Today's Morning Briefing: Reality Check. (1) The man behind the curtain. (2) Hilsenrath beating Bernanke on Google Alerts. (3) Fed gets a D-minus for communication. (4) The focus will be on FOMC’s latest economic projections. (5) FOMC statements explicitly promised to maintain NZIRP, not QE. (6) GDP muddling along. (7) Labor market improving gradually. (8) FOMC may need to lower inflation forecast. (9) Focus on IT, rated market weight. (More for subscribers.)

Sunday, June 16, 2013

The Bond Yield & GDP (excerpt)

In the past, before the era of financial repression imposed by central banks, the 10-year Treasury bond yield tended to trade around the y/y growth rate of nominal GDP. From the 1950s through the 1970s, the yield tended to trade below the GDP growth rate because bond investors failed to anticipate rising inflation.

They learned their lesson and bond yields generally exceeded GDP growth during the 1980s and early 1990s. That was the era of the "Bond Vigilantes," a term I coined in 1983. They contributed to breaking the back of inflation. As a result, by the late 1990s, they became less vigilant. While they’ve been repressed in the US by the Fed since late 2008, they were back in the saddle again during 2010 and 2011 in the peripheral countries of Europe. But then, ECB President Mario Draghi repressed them over there when he said on July 26, 2012 that he’ll do whatever it takes to defend the euro.

If the Fed stops repressing the Bond Vigilantes over here by phasing out QE, then the 10-year Treasury yield should rise to the growth rate of GDP, which was 3.4% y/y during Q1. That would probably be a big shock to the economy.

Today's Morning Briefing: Ben’s Choices. (1) Door #1, #2, or #3. (2) Press conference pressure. (3) Will Bernanke discipline the dissenters or cave? (4) Good excuse to taper QE: Federal deficit is shrinking. (5) Hail Mary pass. (6) Old normal bond yields would be a shock for sure. (7) Big outflow from bond funds last week. (8) EM stocks and bonds are submerging. (9) QE chatter is depressing inflationary expectations and boosting TIPS yield. (10) Retail sales a plus for Q2’s GDP, while discrediting recession forecast. (11) Lowering S&P 500 Retailing to market weight. (More for subscribers.)

Thursday, June 13, 2013

S&P 500 Revenues & Earnings Review (excerpt)

On Tuesdays, Joe and I review the latest analysts’ consensus expectations for S&P 500 operating earnings. On Thursdays, we get the latest revenues data along with the sector details for earnings. So today is a good day to review all of the data through the week of June 6.

(1) S&P 500 revenues. Consensus expectations for revenues edged up slightly for 2013 and 2014. So did forward revenues, which remained 0.8% below the recent record high during the week of April 11. Yesterday, the World Bank released its latest Global Economic Prospects, predicting that the global economy will grow at a lackluster pace of about 2.2% this year and a little better at 3% in 2014 . That is slightly weaker growth than the bank forecast in January. Those are inflation-adjusted projections. Industry analysts are currently predicting that S&P 500 revenues in current dollars will rise 2.3% this year and 4.3% next year.

(2) S&P 500 earnings. The analysts are more optimistic on S&P 500 earnings, which they expect will rise 6.8% this year to $110.87 per share and 11.3% next year to $123.39. As we reported on Tuesday, forward earnings is at a record $116.41.

(3) S&P 500 margins. The analysts are contrarians about profit margins, which they think will rise from 9.5% in 2012 to 9.9% this year, and 10.5% next year. My guess is that most investors believe that profit margins have peaked.

Today's Morning Briefing: Sentimental Journey. (1) Bullish sentiment correcting more than the market. (2) Bull/bear ratios dive after Bernanke testifies. (3) Draghi’s do-nothing policy has worked, but may be starting to disappoint. (4) Is Draghi’s OMT unconstitutional? (5) BOJ playing poker with the Bond Vigilantes. (6) World Bank sees lackluster global growth ahead. (7) Industry analysts see slow-growing revenues ahead. (8) They are more upbeat on earnings though. (9) Focus on underweight-rated Consumer Staples. (More for subscribers.)

Tuesday, June 11, 2013

China (excerpt)

There were no upside surprises in China’s May economic indicators. Instead, they mostly confirm that the nation’s growth rate remains relatively high but may be losing some momentum. Real GDP growth slipped from 7.9% in Q4-2012 to 7.7% in the first quarter. April and May data suggest that growth isn’t picking up.

The month’s industrial output, retail sales, and fixed-asset investment met expectations, rising 9.2%, 12.9%, 20.4% y/y, respectively. Those numbers almost match April’s results. However, imports fell 0.8% y/y as the volume of many commodity shipments fell from a year ago. The volume of major metals imports, including copper and alumina, fell at double-digit rates. Coal imports fell sharply. The PPI inflation rate fell to minus 2.9% y/y in May, the lowest since September 2012.

Export growth slowed to only 0.6% y/y, the lowest since November 2009. Reuters reported on Sunday that the authorities cracked down on currency speculation disguised as export trades to skirt capital controls, which had created double-digit rises in export growth every month this year even as world growth stuttered. May exports to both the US and the EU--China's top two markets--fell from a year earlier for the third month in a row.

Today's Morning Briefing: Around the World. (1) Go Global or Stay Home? (2) The previous bull market was good for MEI sectors. (3) US equity mutual funds investing overseas are still getting inflows. (4) Staying away from some Stay Home sectors. (5) It all depends on global economic growth, which remains lackluster. (6) No juice in industrial commodities. (7) Euro Zone flat-lining at 2009’s depressed levels. (8) China’s trade data showing weaker domestic and global economies. (9) Two strikes against EMs. (10) Japan’s fireworks show. (More for subscribers.)

Monday, June 10, 2013

Valuation & Earnings Growth (excerpt)

Let’s return to the question of how much investors should pay for growth. Since 1995, Thomson Reuters I/B/E/S has been compiling analysts’ consensus short-term earnings growth (STEG) expectations over the next 12 months (52 weeks since 2005) for the S&P 500. Data are also available for long-term growth (LTEG) expectations over the next five years. The latter series peaked at a record 18.7% during August 2000, just when the Tech bubble burst. It then declined to a low of 9.4% during May 2009. At the end of May, it was 10.9%.

We can compute a PEG ratio for the S&P 500 using the forward P/E and dividing it by LTEG. This ratio recently bottomed at 0.93 during the week of November 24, 2011. It is now back up to 1.30. Is that too high? Not really: It is back to the average of this series since 1995. Given that analysts’ long-term growth expectations are clearly optimistically biased, think of this average as the “normalized” fair value of the PEG.

In other words, the P/E is just about where it should be in our Rational Exuberance scenario, to which we assign a 60% subjective probability. P/Es exceeding say 15 would be more consistent with our Irrational Exuberance scenario (30%).

Today's Morning Briefing: Pegging PEG. (1) The expansion is slow and old, and could last another four years. (2) How much should investors pay for slow but prolonged growth? (3) Pessimistic professor turns optimistic on next four years. (4) Running on fumes or on pent-up demand? (5) PEG is at normalized fair value. (6) The trend growth rate for earnings is 7%. (7) Forward earnings still rising to record highs. (8) Focus on overweight-rated S&P 500 Industrials. (More for subscribers.)

Sunday, June 9, 2013

YRI Earned Income Proxy (excerpt)

Friday's employment report for May was just down the middle. On Friday morning at 6:00 am, the NYT posted an article titled, “Wall Street’s Ideal Jobs Gain: Middling.” I was quoted in it saying that the market would be happy à la Goldilocks with any payroll number between 100,000 and 200,000. The gain was 175,000.

The result was Goldilocks on steroids. The stock market tends to do best when investors are least concerned about the prospects of a recession. Friday’s numbers were reassuring because our YRI Earned Income Proxy rose to yet another record high. 
We derive it simply by multiplying aggregate weekly hours times the average hourly earnings of total private industries times 52 weeks/year.

Today's Morning Briefing: Down the Middle. (1) Between love and hate. (2) Guidance from Hilsenrath. (3) Fed Debating Society. (4) The suspense is in the bond market. (5) S&P 500 remains remarkably resilient and overbought. (6) Friday was good for overweight-rated CFI sectors, which have led the bull. (7) Retailers getting pricey with P/E at 20. (8) Financials are relatively cheap. (9) Industrials should beat Energy and Materials in slow-growing global economy. (10) Earned Income Proxy rises to another record high. (11) Goldilocks on steroids. (More for subscribers.)

Wednesday, June 5, 2013

Nikkei & DJIA (excerpt)

First, let's note that when the Nikkei and the DJIA are put on the same chart with the same scale and the same timeline starting in 2009, they tracked each other very closely during the first year of both their bull markets from March 2009 to April 2010.

The Nikkei bottomed at 7054 on March 10, 2009. The DJIA bottomed at 6547 on March 9 of that same year. They both rose to just over 11000 during April 2010. They started to diverge after that, with the Nikkei not just underperforming the DJIA but actually trending down slightly until late 2012.

The Nikkei’s spectacular rally starting near the end of 2012 propelled this stock index all the way back up to slightly surpass the DJIA on May 21. On that day, the DJIA closed at a record high of 15387, while the Nikkei closed at a six-year high of 15627 the following day. As noted above, since then the Nikkei is down 16.7% to 13014, while the DJIA is down 2.8% to 14960. The same story can be told comparing the Nikkei to the S&P 500 since the start of 2009.

Today's Morning Briefing: Inflection Point? (1) New vs. old stock market adages. (2) Go away on May 21. (3) A correction in a secular bull market. (4) The trouble started on May 22. (5) Putting the Nikkei and the Dow on the same page. (6) Curbing our enthusiasm for now. (7) QE may be losing its magic. (8) Nikkei drops despite BOJ’s massive liquidity pumping. (9) QE goes from win-win to lose-lose. (10) So what should we be rooting for? (More for subscribers.)

S&P 500 Revenues & Global Trade

Yesterday I noted that the outlook for S&P 500 revenues growth is weakening rather than strengthening, as I expected by now. Monday’s M-PMI was certainly a downer. The latest global trade data also aren’t comforting. The good news is that both the value and volume of world exports remained near their recent record highs. The bad news is that they aren’t growing.

The values of both world exports and US exports are highly correlated with S&P 500 revenues. US exports also are near their recent record high, and also not growing.

Today's Morning Briefing: Premature Tightening. (1) Sideways beats the alternatives for now. (2) Fed painted into a corner. (3) US yields are the new focus for investors. (4) FOMC turning into a debating club. (5) Watching mortgage applications. (6) REITs get hit. (7) Esther George dissents again. (8) Bernanke needs to herd FOMC rabbits. (9) Latest global trade data are wet towel for revenues. (10) Focus on overweight-rated Transportation stocks. (More for subscribers.)

Monday, June 3, 2013

S&P 500 Revenues & M-PMI (excerpt)

May’s M-PMI raises yet another warning flag about the flagging prospects for S&P 500 revenues. Nevertheless, I still expect that global nominal GDP will increase by 5% this year and 5% next year. Revenues should grow by at least as much. However, the latest data points aren’t supportive of this relatively upbeat outlook.

The M-PMI is highly correlated with the y/y growth rate in S&P 500 revenues. The latter rose only 1.3% during the first quarter. The purchasing managers’ index suggests that this growth rate might have worsened rather than improved during the second quarter, when I expected to see an improvement.

I monitor the consensus expectations for S&P 500 revenues and earnings per share based on weekly data compiled by Thomson Reuters I/B/E/S. Their revenue estimates for 2013 and 2014 have dropped sharply during the first four weeks of May to new lows. They now expect revenues to grow 2.2% this year and 4.4% next year.

Today's Morning Briefing: Mood-Altering Drugs. (1) All Fed all the time. (2) Making the pain go away. (3) Lockhart giveth what Williams taketh away. (4) M-PMI is bad news for revenues. (5) Industry analysts curbing their enthusiasm for revenues. (6) Yet forward earnings rising to new highs. (7) Industry analysts see more upside to margins. (8) Focus on overweight-rated Financials. (More for subscribers.)

Sunday, June 2, 2013

TIPS & Gold (excerpt)

The core CPI and personal consumption expenditures deflator (PCED) rose only 1.7% and 1.1% y/y during April. The latter is the lowest reading for the core PCED on record and well below the expected inflation rate in the 10-year TIPS, which is also falling.

The demand for inflation-protected bonds tends to rise (fall) when inflationary expectations are rising (falling). In the current environment, inflationary expectations are falling, and so is the demand for inflation-protected bonds, which is why the TIPS yield is rising.

The narrative gets more interesting still when we see that the inverse of the TIPS yield remains highly correlated with the price of gold. What’s that all about? Obviously, rising gold prices must reflect some concerns about rising inflation, which would increase the demand for TIPS. This year’s break in the gold price suggests that inflationary expectations are coming down, and so is the demand for TIPS. By the way, the price of gold tends to be a useful indicator of the underlying trend in industrial commodity prices.

Today's Morning Briefing: Clash of the Titans. (1) Despite all the clashes, stocks at record highs. (2) The clash that could crash stocks. (3) Central bankers are central planners. (4) Bond Vigilantes are rising from the dead. (5) Mythology and the bond market. (6) Yields rising despite record low inflation reading. (7) Bad breaks for gold and TIPS. (8) Back to old normal in bond yields? (9) The Fed is getting cornered. (10) Don’t bet against the richest men in the world. (11) The Hindenburg Omen. (More for subscribers.)