Bank Stocks May See More Trouble As Inflation and Yields Fall

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Bank Stocks May See More Trouble As Inflation and Yields Fall

MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN SHARES OF NFLX

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It will be another roller coaster week for stocks as investors now have earnings to digest and there will be no shortage of those. Netflix will be the headliner this week, and there is no doubting that strong results out of Netflix may get the bulls juices flowing again. But for Netflix, it may come down to subscriber growth which is the metric that matters most. After a disappointing second quarter, the company will need to deliver better than expected third-quarter subscriber growth. The results come Tuesday at the close of trading.

Yields

None of that may matter if the bond yields continue to climb, and as we have talked about the 10-year may be the most crucial gauge. Should the yield on the 10yr fall below 3.12% it may set up a move sharply lower back to the 3% range perhaps even the 2.90’s.

Inflation

The inflation outlook continues to look tame when considering the movement in some essential commodities.

Copper

Copper, a core base metal and gauge for economic growth, has performed poorly in recent months.

Platinum

Platinum, an essential metal used in catalytic converters in the auto industry, is trading at prices not seen since the 2008 financial crisis.

Iron-ore

Iron-ore another key metal used in construction has seen its price continue to slide.

PPI & CPI

The producer price index y/y growth has now turned lower and is showing signs of disinflation.

CPI has as well.

It would all seem to suggest that inflation rates are likely to stay low with a risk of disinflation -slowing inflation. If that is the case, it poses a serious problem should the Fed continue to raise rates. It seems more likely to me that yields on the long-end of the curve will continue to sink over the longer-term, not rise. That will further pressure spreads on yields and potentially invert the yield curve. That would obviously be a horrible scenario of the banks.

BANKS

The way the bank stocks are now trading it would seem that investors may be thinking the same. It was the higher interest rate story that helped to push the bank stocks up in the post-election run-up in late 2016. Now it seems to be going the other way.

Back tomorrow with the look ahead for the week.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks. For research syndication, licensing, or consulting inquiries, visit michaeljkramer.com.

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inflation, yields, rates, banks, netflix, cpi, ppi

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