Thursday, May 26, 2022

Morning Note: Fed Can't Have it Both Ways -- And -- So Far So Good (our 'short-term' assessment)

A smart, deep-thinking subscriber (and client) inspired some content for this morning's note.

Here's a snippet from my response to his thoughtful contribution to yesterday's comment section:

"At the end of the day, Powell in all likelihood can't have it both ways. He'll ultimately have to make a choice... If indeed the Fed is going to land inflation anywhere near their 2% target, they're going to have to tighten to the point where markets crack and recession hits... If he once again pivots in favor of markets, it'll have to occur amid a notably slowing inflation rate of change (but not remotely reflecting an ultimate 2%) offering him an excuse to ease off the pedal.

He'll have to say that -- directionally -- inflation's coming down, so they're pausing the tightening... If the economy is reeling at that time, they could even begin loosening policy, in which case the equity market may rally back, bringing back animal spirits, and, all of a sudden, the combination of fresh liquidity and rising asset prices will quickly exacerbate inflationary pressures all over again.."

Economist/strategist Peter Boockvar, from his note this morning, sees what we see in terms of short-term and long-term probabilities (not certainties, mind you) for equities:   emphasis mine...

"The market mood, not surprisingly, is still pretty dour. Yesterday II said Bulls were at 28.2 from 27.8 while Bears fell to 40.8 from last week’s 43 print which was the highest in 11 years. Those expecting a Correction rose almost 2 pts. Today, AAII said Bears were up by 3.1 pts to 53.5 which is a 4 week high and is 6 pts from the highest since March 2009. Bulls fell by 6.2 pts to 19.8 and that is a 4 week low. It got as low as 15.8 in April. The CNN Fear/Greed index yesterday closed at 14 vs 9 one week ago. Bottom line, with sentiment in the dumps (although has been for a while), there is always the potential for a bear market violent rally and I still wouldn’t be surprised if we made an attempt towards the 4100-4200 level, but which would be major resistance if so before the next bout of challenges as QT starts. THE bottom is still in the future."

With regard to those short-term probabilities we've been exploring in the videos, so far so good.

60-minute SP500 chart:


But please keep in mind, the longer-term setup remains net bearish for now...


This morning revision to Q1 GDP showed deterioration from -1.4% (the first estimate), to -1.5% (the final estimate will be released on 6/29). Interestingly, its highest-impacting component, personal consumption, was revised to a very healthy +3.1%. Non-residential investment (capex) held steady, while residential investment was revised notably lower, to +0.4%. A massive quarter for imports vs exports -- reflecting high relative US consumer demand -- ultimately explains the overall negative print. 

Bottom line, on balance (despite the negative Q1), these are not recessionary data. Q2 is so far shaping up to produce a positive GDP print.

Asian equities were yet again mixed overnight, with 8 of the 16 markets we track closing lower.

Europe's catching a bid so far this morning, with only 2 of the 19 bourses we follow (5 are closed today) trading lower as I type.

US stocks are green to start the day: Dow up 378 points (1.18%), SP500 up 0.98%, SP500 Equal Weight up 1.35%, Nasdaq 100 up 0.80%, Nasdaq Comp up 0.77%, Russell 2000 up 1.42%.

The VIX sits at 27.98, down 1.37%.

Oil futures are up 2.11%, gold's down 0.50%, silver's down 0.37%, copper futures are up 0.07% and the ag complex (DBA) is up 0.35%.

The 10-year treasury is down (yield up) and the dollar is down 0.33%.

Among our 38 core positions (excluding cash and short-term bond ETF), 33 -- led by Dutch Bros, AMD, carbon credits, oil services and financial stocks -- are in the green so far this morning. The losers so far are MP Materials, gold, silver, treasury bonds and base metals futures.

Hari Krishnan was prescient in his excellent 2021 book Market Tremors:

emphasis mine...
"Under the current regime, it has taken a great deal of Central Bank coordination to maintain a reasonable level of stability across the major currency pairs. In the meantime, alternative forms of exchange with a fixed supply, such as gold and Bitcoin, have rallied. The Central Banks have collectively walked a tightrope in their activities. We would argue that synchronized easing is an inherently unstable process, as the financial system is highly non-linear and sentiment driven. The fault lines for a major dislocation in currency or bond markets are now in place."

Have a great day!