Is The Stock Market Signalling Inflation?

Louis Scatigna

Wild day in the financial markets as U.S. stocks and bonds moved both dramatically and inversely. Following the GM bankruptcy announcement at 8am this morning, economic reports showing manufacturing shrinking at a slower pace (but still shrinking) and construction spending rising (from a dismal level) sparked a broad stock market rally. At the same time prices for the 10 year U.S. Treasury tanked causing yields to rise an unusual and large 1/4 % to 3.72%. Commodities continued to rise especially the energy complex with Oil up 3.45% at 67.78 bbl up $2.26. Natural gas futures were up a whopping 10.8% for the day. Food commodities also joined the party with many ag products up over 2%.

Stocks are acting like they are commodities and could be taking off in anticiaptaion of inflation. Stock markets tend to perform well in an inflationary environment. Who would have guessed that the day General Motors declared Chapter 11 that the markets would take flight? The S&P 500 was up 2.58% while the Dow closed up 221 points or 2.6%. I still expect another nasty leg down in this market and had a sneeky suspicion that we were on the cusp of it last week but I may have to rethink my analysis. The Dow, S&P 500 and Nasdaq are all above their 200 day moving averages, a very powerful technical signal of higher prices to come. I would need to see it above the 200 day average for the rest of the week to get more bullish on stocks.

I'm sure the Fed and Treasury share my growing concern about the dollar and treasury prices. The dollar and bonds are absolutely tanking and with that comes inflation and higher interest rates, two things that the fragile economy just can not handle. Gold and silver took a breather today but remain at lofty levels as investors worldwide trade in their ever depreciating U.S. dollars for the only currency that can't be printed.