You don’t need a weatherman to know which way the wind’s blowing, Bob Dylan sagely advised some years ago. And for the markets, the wind seemed to be blowing the same way across a number of fronts -- that is, from a deflationary direction.
 
Most dramatic were the swings in the U.S. stock market, which initially soared only to relinquish their gains and ultimately end lower. That would simply seem to fulfill J.P. Morgan’s famous observation that markets will fluctuate, but the session was more telling to observers of such things.
 
The seemingly minor 0.26% decline in the Standard & Poor’s 500 would appear almost banal were it not the result of wild swings. After opening strongly and having been up a hefty 1.4%, the big-stock benchmark gave that back and more.
 
The significance is that the moves constituted what technicians call an “outside down day” -- a higher high than the previous session plus a lower low, and ultimately ending lower. Such outside days tend to produce what’s dubbed as key reversals in the market trends, depending on how the session resolves itself. In this case, it was to the downside.
 
Leading the way lower were homebuilding stocks and KB Homes  in particular, which plunged some 16%. While the builder reported strong earnings and a decent backlog of orders, it also warned of some margin pressures owing to rising costs and increased need for price cuts.
 
KB noted weaker-than-expected sales in inland California, a second-tier region that prospered during the past decade’s bubble from demand from homebuyers who flocked to its suburban sprawl because they were priced out of the more desirable coastal areas. The New York Times last year highlighted the so-called Inland Empire in a feature as a center of new poverty in what had been seen as a middle-classed enclave.
 
Weakness invariably shows up first in the more marginal sectors of any market, especially residential real estate.
 
Economic data released Tuesday, which reflects past conditions rather than the present let alone the future, continued to suggest apparent strength, however. The Job Openings and Labor Turnover Survey -- JOLTS to the economic-data junkies -- showed more openings and a greater willingness on the part of job-holders to quit in November. That provides circumstantial evidence of a more robust labor market. That, however, was belied by the slump in average hourly earnings in December, according to the employment report released last Friday.
 
Meanwhile, the National Federation of Independent Business reported optimism among small businesses rose again in December, reaching the highest level since December 2006, a year before the last recession began. While their plans to hire rose four percentage points, to 15%, some 80% of employers who were looking for staff said they were getting few or no qualified applicants for openings. Yet, for whatever reason, there’s no bidding war for talent, which would be a sign of inflation in the labor market.
 
Price pressures also remain to the downside in the commodities market, with U.S. crude falling to a 5½-year low, trading down below $46 a barrel. Meanwhile, the premium for so-called Brent crude, the European benchmark, was eliminated amid the glut in the oil market. Brent had commanded about $10 more at the market’s peak in mid-2014 owing to geopolitically inspired supply concerns.
 
The negative effects of the oil-price plunge continued to ripple through the industry with Canada’s Suncor Energy announcing it will slash one billion Canadian dollars ($836 million) from its 2015 spending while cutting 1,000 jobs. It remains to be seen if the lift to spending from consumers’ windfall at the gas pumps offset the loss of these hefty paychecks. Meanwhile, industrial metals slid across the board with copper traded on the New York Comex dropping another 1.7% while grains such as wheat and corn remained under pressure.
 
Despite the strong economic data, the bond market sees things as the commodities markets do. Treasury yields continue to hover at historic lows, which isn’t news, but various market interrelationships reveal more. The inflation premium in T-note yields shriveled further, evidenced in the TIPS spread (discussed here last week), indicating expectations inflation will average only 1.55% over the next decade. (If you the consumer price index will rise more, consider TIPS, as the Wall Street Journal suggested recently.)
 
The Treasury market also expressed its considered opinion that bond yields will remain lower for longer by sending the 30-year long bond to equal its record low of 2.50%. That further shrank the spread between the benchmark 10-year note, which ended Tuesday at 1.90%, to just 60 basis points (0.6 percentage points.) A year ago, the long bond yield provided half-again the yield pick-up.
 
Such a flattening of the yield curve is a classic market signal of disinflation. And, in the spirit of the times, there’s an exchange-traded product to play that trend. The iPath U.S. Treasury Flattener exchange-traded note (FLAT) is up 11.35% over the past year versus 10.01% for the S&P 500, according to Yahoo Finance. And that’s bested by the greenback, which players at home can trade via the PowerShares DB US Dollar Bullish ETF, which is up 12.9% over the span.
 
Despite the stronger economic data, which mainstream economists insist should push the Federal Reserve into raising its short-term interest-rate target by mid-year, the markets keep pushing that eventuality farther out in the future.
 
According to the CME’s FedWatch site, it’s now just a hair less than even money the federal funds target rate will be 0.5% by the time of the Sept. 17 meeting of the Federal Open Market Committee. (The key rate has been pegged at 0-0.25% for just over six years since the financial crisis.) It’s also a bit less than even money the fed funds rate will be 0.75% by the Dec. 16 FOMC meeting, with that target attained at the Jan. 27, 2016 confab.
 
The sum total of the markets’ message is surprisingly uniform: stocks, bond, commodities and currencies all indicate the winds are blowing toward disinflation.
 
Dylan was right. Weathermen and women and economists may insist their forecasts are correct, but the markets are the telltale that tells you which way the winds are blowing.