Divergent Stocks Go Their Own Way Ahead Of Critical Data
Stocks finished the day higher after a weaker-than-expected PPI report. Although rates fell, it didn’t result in a significant yield curve steepening, and the dollar was only slightly weaker. Overall, the day was relatively quiet, serving as a reminder of the market divergence that occurred on July 31.
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The USDJPY moving back and forth within a range is what the equity market prefers, allowing for these types of divergences. However, if the USDJPY starts trending lower again, it could become a bigger problem. This is because the USDJPY tends to move in line with interest rate differentials, and as long as rates in the US are falling, it will likely cause the USDJPY to decline as well.
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The yield curve also steepened today, but it is trending upward slowly at this point. It cleared resistance after the job report, but it has stalled since. I think we need more data to get a clearer picture, whether it’s a weak CPI report tomorrow or an increase in continuing claims and initial jobless claims. It’s possible that the most important data this week isn’t even the CPI but the claims data on Thursday. Last week’s claims numbers certainly shifted the momentum.
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The yield curve generally tracks continuing claims and the unemployment rate over time. If the bond market gets a hint that the unemployment rate is going higher, the curve will likely continue to steepen.
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If the yield curve is steepening and the yen carry trade is still unwinding due to a narrowing rate differential, then a brief rally in the stock market over a few days won’t make much difference in the long run.
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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and ...
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