Chinese CPI was reported at 1.8% annualized versus 2.2% in
June and 1.7% expected. Chinese PPI fell 2.9% versus a 2.1% contraction in June
and 2.5% expected. Chinese industrial production rose 9.2% in July, less than
the previous rate of 9.8% and expectations of a 9.5% rise. Retail sales and
fixed investment data was also reported below estimates.
Market data out of the US this morning included the balance
of trade and jobless claims. The trade deficit shrank this morning on lower oil
prices and a general decline in imports. Jobless claims came in at 361K versus
365K last week.
This week has been a relatively mild trading week for the
market with the exception of bonds. The S&P 500’s ($SPX) range this week
has been just 16.1 points so far and the index has demonstrated low relative volatility
compared to previous weeks. However, bonds ($TLT) have been moving decisively
downward, 2% off Monday’s open. We are seeing a steepening of the yield curve
right now: short terms rates are depressed due to expectations of “exceptionally
low” interest rates through 2014 while long-term rates are rising. Operation
Twist, in which the Fed sells bonds with maturities of 3 years or less and buys
bonds with maturities of 6 years or greater, will run through the end of the
year and has the effect of flattening the yield curve. The fact that we are
seeing the yield curve steepened despite operation twist means the market is
already anticipating its end.
Some are already calling the end of the bull market in
bonds, such as Elliot Management’s Paul Singer, who yesterday said “Long-term government
debt of the US, UKL, Europe, and Japan probably will be the worst performing
asset class over the next ten to twenty years. We make this recommendation to
our friends: if you own such debt, sell it now. You’ve had a great ride, don’t press
your luck. From here it is basically all risk with very little reward” (Zero
Hedge).
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