@theMarket: Higher Bond Yields Keep Markets in Check

The continued concerns over oil prices, inflation, debt/deficit, and renewed hostilities in the Middle East kept a lid on equities in these last days of summer. Despite all the fear and loathing over higher long-term bond yields in the last week or two, the markets are only down a few percentage points from all-time highs.

 

As readers are aware, I have been cautious in August and September, although I would see any consolidation as a buying opportunity. That said, there are more than enough concerns plaguing the market at the moment to make anyone cautious.

 

Oil almost  $90 a barrel again, a re-engaged, shooting war of sorts in the Middle East; bond yields at highs not seen in years; and, of course, the midterm elections, which are now only 60 days away. It is the last event that keeps me looking over my shoulder the most.

 

It bears repeating that during the last three midterm elections in 2014, 2018, and 2022, the S&P 500 fell more than 10 percent during either August or September. All three times the sell-off occurred during the third week of the month. That doesn't mean it will, but it might.

 

In the meantime, the U.S. Treasury will begin buying back bonds beginning today, Sept. 4. And like clockwork, the bond vigilantes pushed up yields on long-dated Treasury bonds until the middle of the week before taking profits yesterday. Stocks, precious metals and the dollar all fell as a result.

 

While the financial media wailed and gnashed their teeth at this predicament, bond traders (of which there are few dummies) prepared to take profits and cover their shorts. Why take the risk that Treasury Secretary Bessent orders his guys to step in and start buying bonds beginning Friday or over the weekend? For those who missed it, take a gander at my latest columns on the bond market for more background on the present situation in that world.

 

That brings us to Friday, and the results of the latest non-farm payrolls report for August. With earnings results mostly over, and most trading desks with a "do not disturb" poster on their computer screens this week, the number took on added importance. Even though everyone knows by now the number will be inaccurate and subject to large revisions.

 

The job gains for August were 162,000, much better than the 50,000 forecasted. Wow! What a surprise, good employment numbers just two months before elections! Markets took the number in stride even though it builds the case for an interest rate hike by the Fed. I am still doubtful that will happen, although the Fed probably sees what I see — higher inflation data in the future.

 

The announcement that the U.S. will purchase one-fifth of Venezuela's crude oil reserves through a private company run by a buddy of the country's dictator (with a checkered past) was no surprise to me. I guess it is better than just stealing 20 percent of their oil reserves. 

 

Back in November of last year, in "The Return of Gunboat Diplomacy," I argued that President Trump had his eye on obtaining Venezuela's vast oil reserves as opposed to wanting regime change and the end of the non-existent smuggling of Fentanyl into the U.S.

 

I am ignoring all the social media posts about how this will bring down gas prices and refill the Strategic Petroleum Reserve (SPR) lickety-split. It won't. If you read my November column, you will understand that it will take years and many billions of dollars to repair Venezuela's energy infrastructure and further develop that country's oil reserves.

 

In addition, the crude coming out of Venezuela is heavy oil. Our SPR was built for light and medium crude. That's going to be a problem. Is the deal worth doing? Yes, and we will do it — provided both countries agree to cooperate over the coming decade.

 

We have had a difficult past with that country's leaders and their oil wealth for a long time. U.S. oil companies have pumped massive amounts of wealth and expertise into the Orinoco Basin only to see a series of expropriations, takeovers by the state, graft, bribes, and you name it. It's a risk, but that was the strategic objective of our gunboat diplomacy last year and could over time double our own oil reserves.

 

The three-day Labor Day weekend marks the end of Wall Street's summer. It would not surprise me to see a little government action in the days ahead to bolster bond prices, with yields hovering at the top of their range. On the energy front, the summer driving season is coming to an end. That may relieve some of the price pressure on gas prices. 

 

As for the markets, they will still be there on Tuesday, so focus instead on relaxing, fun, and the family. Happy Labor Day.