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Clearly, all markets aren't all in on the Fed and the ECB's (European Central Bank) stated view that the present level of inflation, while not abating as soon as they had anticipated (prayed), is "transitory." Rate hike odds -- more and sooner than previously priced -- are being priced in to a degree that is beginning to play havoc with yield curves.
Here's our chart of the 2yr/10yr treasury yield curve:
"The big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend."
--Jesse LIvermore
Once again, we'll devote this week's main message to the highlights from the past week's key messaging:
So, US GDP for the 3rd quarter came in at 2.0%, thanks to a build in inventories. Were it not for inventories, growth would've been nada.
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As I've noted herein a few times heading into this earnings season, we've been keenly concerned with the forward guidance companies might issue in the face of persistent bottlenecks in virtually all things input, including, apparently, labor.
I've seen several blurbs of late on how positive breadth readings are for the S&P 500 Index, particularly the comparison between advancing and declining members.
In this morning's note I suggested that a "regime" change may be in the offing. It's always interesting to track style relationships over a few market cycles.
Well, the very short-term SP500 technical setup, while not as bearish as it was bullish (as I pointed out in this video) heading into the month, doesn't look all that constructive as we close out the month.
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The opening sentence from this week's release of the Fed's Beige Book* echoes the story we've been telling of late. That is, recession risk remains low, but growth is slowing:
The following blurb from BCA Research yesterday comports to a virtual T with our go-forward macro thesis related to equities and, per the last sentence (although for add'l reasons), the dollar -- and, thus, with our present on balance positioning:
As you may have noticed, September was relatively tough on the stock market:
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
One of our concerns heading into this earnings season was the extent to which rising input costs would do a number on corporate bottom lines and forward guidance, and, thus, on stock prices.
The 2-year treasury yield (in orange below) -- a presumed harbinger of Fed funds rates (white line) to come -- is suggesting that the Fed is not far away from doing more than simply tapering its monthly bond purchases:
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Please pardon my cynicism, and we do like banks right here, but when the powers that be engage in what ultimately amounts to the pumping of unthinkable liquidity into the financial system (read markets), well, yeah, you're going to see news lines like this following a Goldman Sachs' earnings announcement:
Inflation, per this morning's CPI print, is running hotter than economists predicted, but certainly not hotter than you and I are feeling. But, hey, maybe not... I mean J. Powell did say inflation is concentrated in just a few select areas.
So, if we ex-out, umm, well, like everything, we're good.
Suffice to say that, while we see low recession odds on the foreseeable horizon, overall economic sentiment is clearly waning.
On the global front, the IMF published its latest World Economic Outlook this morning.
Here's the intro: emphasis mine...
With the bond market shuttered and no major data releases or earnings reports this morning, there's not much to cover on this side of the pond.
Well, then again, there is the price of oil, which now fetches over $80/barrel! We've mentioned plenty herein how there simply won't be the expansion of fossil fuel production capacity that $80 and a growing global economy might otherwise inspire. That said, there are for sure plenty of existing wells that can be turned back on as, yes, there's money to be made at $80. Baker Hughes just reported the 5th week in a row of rising rig counts, and we should expect refining capacity to expand (come back) going forward, coming off of hurricane and, not to mention, COVID constraints.
Yesterday evening I listened to the latest Grant Williams and Bill Fleckenstein "End Game" podcast; their guest was Simplify Asset Management's Harley Bassman.
While I didn't necessarily agree with all of Harley's assertions, I nevertheless found him to be an exceedingly sharp, very deep thinker on markets.
The following exchange resonated with me; i.e., with my view of present Fed policy and the hazardous setup it engenders:
An uptick in the JPMorgan Global Composite PMI (Purchasing Managers Index) has our macro index back above 20 this week (20.85).
At first blush this morning's jobs number looked like a big bust; 194k net jobs added vs 500k expected.
At second blush, however, it was fine:
I'm unexpectedly on the road today, so I wasn't in a position to offer up the usual morning note.
As I suspect you noticed, equity markets staged a nice rally today that was essentially follow through on yesterday's bounce; that by all appearances was inspired by some political give on the debt ceiling.
In yesterday's video commentary I finished with:
"...we have huge opportunities relative to our longer-term weaker-dollar/inflationary thesis that we think are going to play out nicely over the next few years. Next few weeks and months? I dunno..."
I.e., while we fully anticipate intense (at times) volatility across, for one, our commodities exposures, our base case relative to what are slow supply responses to increasing pricing dynamics remains very much intact.
Interesting action so far this morning. Overnight, as equity futures were melting down, headlines suggested it was all about rising interest rates and energy prices. However, before we made it to the cash session, interest rates turned negative and energy prices, nat gas in particular, utterly plunged. And, while off their lows (in the U.S.) stocks are still struggling notably.
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In our portfolio discussion yesterday Nick and I pondered the coming earnings season. The key question: How are companies going to handle their forward guidance when so many are hamstrung by lack of necessary materials, components and such?
As we enter what is typically the best quarter for equities, market actors worry over the outcomes of what are, at this juncture, essentially little more than political calculations.
Quick update this week.
Our macro index moved down a titch with just one input (durable goods orders ex-transportation) changing score (positive to neutral).
Equities (in the pre-market) were looking to extend their selloff into October when Merck announced positive test results on its oral anti-viral COVID treatment. Apparently sparking a notable move from red to green in futures.
So, we'll see, the pattern of late for U.S. equities has been one of deterioration as the trading day wears on.
