Why Are Treasury Yields Up?

The 10-year Treasury yield leaps higher … Chinese stocks surge then collapse … the war over automation isn’t over … watch Tesla’s “We, Robot” event tomorrow

With the Fed now in rate-cutting mode, why are Treasury yields racing higher?

As you’re aware, the Federal Reserve cut its target interest rate by 50 basis points on September 18.

When the Fed lowers interest rates, it reduces the cost of borrowing. This generally leads to a decrease in bond yields because investors anticipate lower returns on bonds issued at lower interest rates in the future.

So, why, in the three weeks since the Fed’s rate cut, has the 10-year Treasury yield jumped 10%?

Source: StockCharts.com

Legendary investor Louis Navellier addressed this in yesterday’s Accelerated Profits Weekly Issue.

His answer boils down to three things: 1) tremendous demand for mortgages now that rates are falling, 2) positive economic data suggesting an improving U.S. economy, 3) and surging crude oil based on fears of a wider war in the Middle East.

From Louis:

When there is positive economic growth coupled with an increase in inflation, it places upward pressure on bond yields. And that’s what we’ve seen play out over the past week.

Now, while the uptick in crude oil prices will have an impact on inflation going forward, I suspect this week’s consumer and wholesale inflation reports will still be favorable.

The September Consumer Price Index (CPI) will be announced on Thursday, while the Producer Price Index (PPI) will be released on Friday. Both are anticipated to show that inflation is in check right now.

We’d like to see this week’s inflation reports come in soft as Louis just noted. The risk of a resurgence in inflation is already causing traders to recalibrate their bets on the number and size of rate cuts from the Fed this year.

It’s also resulting in some interesting commentary from Fed officials. Last week, Richmond Federal Reserve President Thomas Barkin said, “I’m more concerned about inflation than I am about the labor market,” and “I do think getting stuck is a very real risk.”

Excuse me?

It was less than a month ago that Federal Reserve Chairman Jerome Powell said the opposite at his FOMC press conference:

As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished, and the downside risks to employment have increased.

If inflation “gets stuck” as Barkin fears, resulting in a slower pace of rate cuts, that risks upsetting Wall Street, which is betting big on rate cuts to power this bull market for the rest of the year and into 2025. Lots of moving parts here. We’ll report back after tomorrow’s CPI report.

Meanwhile, looking east, if you’re investing in China, get your Dramamine ready

As we’ve covered in the Digest, Beijing has recently unleashed a tsunami of stimulus for its beleaguered economy, as well as billions of liquidity support for the Chinese stock market.

This has sparked a generational rally in Chinese stocks. Hong Kong’s index just capped its best three-week stretch since 1975…

Source: StockCharts.com

Before dumping nearly 10% yesterday…

Source: StockCharts.com

This collapse happened after Chinese officials failed to give investors assurances of more stimulus.

Here’s CNBC:

The rally in Chinese markets lost steam on Tuesday after a briefing from the country’s National Development and Reform Commission provided few details on further stimulus.

While mainland China’s CSI 300 skyrocketed over 10% at the open Tuesday in its return from the Golden Week holiday, the index pared gains to record a gain of 5.93% and end at 4,256.1.

Hong Kong’s Hang Seng index briefly plummeted over 10%, before recovering slightly to a smaller loss of 9% as of its final hour.

As I write Wednesday, China’s mainland CSI 300 index dropped 7%, while the Hang Seng in Hong Kong shed another 2%.

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Bottom line: The kind of extreme volatility we’re seeing in the Asian markets can be fantastic for making lots of money fast…or losing money fast, just as Hong Kong investors found out yesterday.

As The Wall Street Journal put it, “In recent years, China’s stock market has enjoyed similar stimulus-fueled bull runs, only to have them end in tears.”

If you want to trade this, please be careful so that it doesn’t end in tears. Click here for more about TradeSmith.

Meanwhile, though the dockworkers strike is off (for now), the battle over automation isn’t going anywhere

As we covered in the Digest last week, the International Longshoremen’s Association (ILA) reached a tentative deal to suspend its strike until January to negotiate a new contract.

This avoids supply chain snarls, empty shelves at retailers during the Christmas shopping season, and potentially, upward pressure on inflation.

But while the tentative deal addresses the ILA’s demand for higher wages, the broader issue – automation – remains a point of contention.

This comes as no surprise to regular Digest readers. We’ve been spilling lots of ink in recent issues, profiling why the trend toward “more automation” is inevitable and will result in even more battles between labor and management in the quarters to come.

Yesterday, the Wall Street Journal highlighted this issue:

What [United States Maritime Alliance] can’t afford, and the U.S. economy can’t either, is a ban on the future use of automated cargo-handling technology at ports along the East and Gulf coasts.

“Absolute, airtight language that there will be no automation or semi-automation” remains a key demand of the International Longshoremen’s Association that still must be negotiated ahead of a new Jan. 15 deadline.

Why is this such a crucial issue, and why do port employers adamantly oppose the demand?

The key reason is the need to create future port capacity. Since the U.S. is building new port facilities at a snail’s pace—the last new marine container terminal, at Charleston, S.C., opened in 2021 and was the first since 2009—the only way to expand capacity is by handling more cargo more quickly through existing facilities.

The only way to do that is with automated cargo handling…

The lack of automation in the U.S.—only three port facilities are fully automated, all on the West Coast—exposes ports as an Achilles’ heel of U.S. trade competitiveness. High costs and inefficiency have long been the status quo.

We’ll continue to update you on this specific situation with the ILA, but the bigger story here is how AI fixes “high costs” and “inefficiency,” and that’s going to revolutionize…everything.

One example of this comes with tomorrow’s “We, Robot” event from Tesla

In discussing the global economy’s shift toward automation and robotics, we’ve been highlighting tomorrow’s big event from Tesla. It’s expected that the company will reveal its first dedicated robotaxi, tentatively called the “Cybercab.”

And why is this significant?

Well, circling back to “high cost” and “inefficiency,” do you know what’s incredibly high cost and inefficient?

Your car.

The average transaction price for new cars has jumped nearly 25% since 2019, and now clocks in at $47,870.

For context, the median U.S. salary is $59,384 (as of Q4 2023). So, what do you get for nearly an entire year’s worth of median salary?

A hunk of metal that, on average, sits unused 95% of the time. Talk about inefficient.

Meanwhile, according to a Bankrate survey from earlier this year, only 44% of Americans say they can afford to pay a $1,000 emergency expense from their savings.

These brutal economics are, in part, why tomorrow’s Tesla event is so big. The Cybercab is purported to offer a convenient, driverless ride at a fraction of the cost of traditional services.

If the cost savings and convenience live up to expectations, how many Americans would gladly let go of their old car (and its huge expense and inefficiency)?

We’re betting a lot.

If so, that’s going to revolutionize the auto industry (and countless related supply chains) forever.

There are two related questions, one micro and one macro…

Micro – which companies are best positioned to benefit from a world in which autonomous vehicles begin to take over the roads?

Macro – what does an increasingly autonomous future (beyond just self-driving cars) mean for our world and the investment markets?

As to the first question, our technology expert Luke Lango provided his answer this past Monday in a time-sensitive presentation. He unveiled his playbook for what he believes are the top multi-bagger-potential stocks to buy today as AV/EV technology reshapes our world. You can catch a free replay by clicking here.

As to the second question, that’s the dominant issue facing our world today.

It’s staring directly at ILA dockworkers… at Detroit auto manufacturers… and at everyone who has seen AI’s extraordinary capabilities, and wrestled with what that suggests for their job security in the years to come.

Earlier this week, we compared global money flows into AI technology to a tilted billiards table wherein all the pool balls flow to the same corner pocket. Why would it not be this way? It’s the logical outgrowth of a technology that slashes costs and increases efficiency.

It’s critical that we’re invested in this corner pocket. After all, as we noted in Monday’s Digest:

In the era we’re entering, there will be just two types of people: the owners of AI, benefiting from the lopsided flow of capital, and everyone else, who are watching AI swallow their former economic productivity like light into a black hole.

AI/automation won’t stop. Make sure you’re ready for what’s coming.

We’ll keep you updated on all these stories here in the Digest.

Have a good evening,

Jeff Remsburg