Inflation

In mid-April, the bond market broke sharply, stabilizing late in the month. The decline brought T-bonds down into the upper ranges of our buying zone (9%-10%). But in the first days of May they have rallied to 8.90%.

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Our Major Trend Index remains decidedly negative. The current ratio of 0.67, although improved from a week ago, is about the same as a month ago. Thus our opinion is unchanged. It appears we are in the early stage of a cyclical bear market.

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The bond market has weathered some recent storms better than anticipated. The dollar has also performed better than expected. But inflation fears could increase in coming months.

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The bond market was fighting to stabilize in February, folowing the "surprise" January decline.

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During most of December the bond market was on vacation.

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I continue to believe that at least a mild recession is in the cards for 1990 and that the deficit will soon start to expand. However, I no longer think this will be a strong negative in terms of bond market psychology, at least not over the next six months or so.

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Inflation continues to cool and the economy is providing more evidence of slowing, but we still have our reservations about the bond market and remain cautious.

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A lackluster T-bond rally in the first half of September seemed to be primarily a flee to quality as junk bonds were trashed. Then in the last week or so T-bonds have moved lower, even as the junk market stabilized.

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The bond market marked time for the first three weeks of July, but came on strong in the last five trading days. July gains in bonds did not keep pace with stocks, but most bonds were up a point or so for the month.

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A preview of our new U.S. inflation histograms, soon to be regular features of our quarterly Benchmarks publication.

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In mid-March, the bond market was jolted by a nasty PPI number and spent the rest of the month creeping back to pre-PPI release levels. The net result was an unchanged to slightly higher bond market in March.

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In February, stocks and bonds tracked the same course. The CRB Index came down significantly in February and was close to breaking down before a late month surge. The JOC Index remains above its January breakout level.

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Forget about the economy, forget about the uptick in the CPI, and forget about the bulge in bond supply. U.S. interest rates rose in November because the dollar went down.

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Wall Street's financial mechanics created chaos in the high grade corporate bond market last month. With exceptions, the LBO frenzy has destroyed, at least for the time being, the usefulness of bond quality ratings. The damage done to many bond portfolios was massive.

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The Gods of the bond market were kind in September, with the bond market performing exactly as we thought it would.

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For the month, the net loss for long T-bonds amounted to a half a point or less. All things considered, I thought it was an impressive performance, even though it took place in the dog days of August.

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T-bonds went into a seven trading day swoon in early July. Then for the rest of the month they backed and filled. Outside the Treasury market, damage was considerably less in July.

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Today, led by soybeans and other grains, the U.S. is getting a dose of Isolated Factor Inflation. The Fed can’t do anything to alleviate this, but Mother Nature can. Good hard rains in the farm belt could take the sizzle out of this brand of inflation.

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U.S. economic history, as I read it, does not support a contention that higher inflation means a stronger stock market. Some believe inflation may be heating up again, so maybe it is appropriate to provide a remedial lesson.

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T-bonds slide 4-5 points in March, with corporates holding up better. Bonds look good, but T-bonds are expected to suffer from renewed inflation fears, dollar weakness, deficit concerns and maybe big foreign selling.

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