Thursday, June 17, 2021

Morning Note: Yesterday's sting...

 Here's from yesterday morning's note:

"Jittery trading so far this week says that markets fear that the Fed may hint that they are aware of inflationary forces that may indeed turn out to be something more than simply "transitory" and, thus, outline what they might actually do about it.
While in my view that makes perfect sense, the number it'd do on markets makes such a confession -- at this particular meeting -- while indeed possible, a lower probability than them focusing on the millions of folks who remain out of work, disappointing retail sales yesterday, yada yada... Without, by the way, remotely acknowledging the fact that hugely generous government benefits pretty much explains both data points (excessive unemployment benefits [disincentive to take a job], and the comedown off of the last stimulus check resulting in lower than expected retail sales)."

Here's from yesterday evening's note:

"So what got the dollar rising and the other stuff featured above falling today?

Well, it was this afternoon's message from the Fed that, while aside from tinkering with the rate they pay banks on excess reserves and in the overnight repo market, they anticipate lifting their benchmark rate off of zero sometime in the year 2023, and that they may even be inclined to cut back a bit on their monthly bond-buying frenzy by this year-end.

Now, frankly, there's nothing historically-speaking consequential in terms of magnitude there. In fact, historically-speaking, it's far less of a threat than one might've expected given the pace of growth, and inflation, of late."

That "other stuff" I referred to was stocks, commodities and emerging market currencies.

So, essentially, the Fed forecast two more years of a zero policy rate, nudging even then to what remains a historically-low level, and maybe cutting back a bit its asset purchases by year-end (in only, I suspect, mortgage backed securities [the federal government will need the Fed to gobble up what'll remain huge treasury bond issuance well into the future]).

My point? Yesterday the Fed dipped its toe into the market's water just to take the temperature (or temperament) for even the modest of monetary tightening, and while assets (equities in particular) -- at least yesterday -- handled it fairly well by the close, that spike in the dollar and what it portends (should it persist), given the present global macro setup has, I suspect, them lining up to do a bit of, well, like I also said in yesterday evening's note:

"Bottom line: Jerome Powell and company have truly backed themselves into the proverbial corner. I.e., should asset and currency markets even threaten to unravel due to what is, by historical standards, a mere placatory nod to those who see rising inflation as presently more than simply "transitory" phenomena, I highly suspect we'll see the Fed walk back today's dipping-of-their-toes, lickety-split."

As for this morning, while commodities (save for oil) are still feeling yesterday's sting, stocks are opening only modestly lower and treasury bonds are already saying "nothing to see here folks." Although treasuries are likely also getting a lift from this morning's worse than expected weekly jobless claims number. In fact, equity futures were notably lower just prior to that claims number as well (yep, with the stock market trading on easy money, bad economic news is actually good news.) Although the day is still very young...

Asian equities struggled overnight. While 3 of the 16 markets we track were closed, only 3 of the remaining 13 closed the session higher.

Europe's struggling this morning as well. Also with 3 bourses shuttered, only 4 of the remaining 16 we follow are in the green as I type.

U.S. major averages are essentially flat: Dow down up 26 points (0.05%), SP500 up 0.06%, SSP500 Equal Weight up 0.10%, Nasdaq 100 flat, Nasdaq Comp down 0.04%, Russell 2000 up 0.03%.

The VIX (SP500 implied volatility) is down 5.01%. VXN (Nasdaq 100 i.v.) is down 1.63%.

Oil futures are up 0.08%, gold's down 2.19%, silver's down 3.28%, copper futures are down 2.00% and the ag complex is down 1.31%.

The 10-year treasury is up (yield down) and the dollar is up a big 0.46%.

Led by MP (rare earth miner), solar stocks, emerging market equities, energy stocks and tech stocks -- but dragged by silver, gold miners, gold, base metals miners, uranium miners and ag futures -- our core mix is off 0.43% to start the day.

With regard to the intentionally soft tone of the Fed's water-testing yesterday, know that it's not so much about the extent to which they may ultimately begin tightening, it's the fact that they're even talking about it that has markets on edge.

Per James Weatherall in his insightful book The Physics of Wall Street:

"...the psychological effect of a change in stimulus isn’t determined by the absolute magnitude of the change, but rather by its change relative to the starting point."

Have a great day!

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