Friday, August 5, 2022

Morning Note: Do Fight the Fed -- Or -- Come Hell or High Inflation

"Don't fight the Fed" has been the market mantra for as long as no doubt many a trader can remember. I.e., you may see nothing but dread when you look out across the macro horizon, but if the Fed's easing (cutting interest rates and purchasing bonds) buy stocks, with both fists!

Now, wouldn't it therefore make sense to, say, sell stocks with equal passion if/when the Fed promises to hike rates and sell bonds?

Well, okay, we're officially in a bear market, but only being down 13% or 19% (SP500 and Nasdaq Comp respectively) -- notably off the depths -- year to date does not a serious bear market make. And when you consider the chorus coming from the Fed after last week's meeting, essentially chastising "the market" with their you're-not taking-us-seriously refrain, heck, you'd think that stocks would, at a minimum, roll right back over and test the bear market low (which is more than 10% lower from here)!

So what gives?

Well, think about it; I wasn't kidding when I suggested that today's market player has truly known none other than the "don't fight the Fed" mantra. So, given that a market-friendly Fed has been their career-long experience, they simply can't bring themselves to believe that the institution that loved them so very much over all those years would in-effect turn on them, to any seriously-painful degree... It's simply not -- given their personal paradigms -- within the realm of possibility.

So then, what gives is either (as depicted above) a fundamental belief that, come hell or high inflation, the Fed will forever have the equity market's back, or, it's that market actors have grown so smart over the years (and/or the Fed so dumb), that they know the economy better than does the Fed. 

I.e., in the latter context, the market sees a notable economic, and, thus, inflation, slowdown coming sooner than later that will catch the Fed off-guard and have them pivoting to a dovish stance earlier than they themselves currently anticipate.

Well, while I do sympathize with the forever-friendly-Fed narrative, as I've stated ad nauseum on the video updates, they simply will not come to the rescue at these levels, not with inflation still a mountaintop above their 2% target. With regard to the notion that the market is smarter than the Fed, well, in the longer-term, I sympathize there as well. In fact, save for the shocking data release I'll present in a second, indicators of late have been indeed flashing recession on the very near-term time horizon. Although the following definitely pours some cold water on those indications.

"WOW" is the word to describe this morning's jobs report!! I'll just borrow the details from Peter Boockvar's morning note
The headline gain in payrolls for July far exceeded expectations with a 528k gain, more than double the estimate of 250k and the two prior months were revised up by a combined 28k. The household survey said 179k jobs were added after losing 315k in June. Combine that with the drop of 63k in the labor force and the unemployment rate fell one tenth to 3.5%, matching the low pre Covid. The all in U6 held at 6.7%.
Wages exceeded the estimates with a .5% m/o/m increase for average hourly earnings and by 5.2% y/o/y, the same pace seen in June. Combine this with the unchanged hours worked at 34.6 and average weekly earnings were up .5% m/o/m and 4.6% y/o/y.
I do have to tell ya, the above is at serious odds with rising unemployment claims, reports from more than a few heavyweights that they're cutting jobs, and the latest trend (lower) in job openings. So, indeed, this has to come as a shock to the financial markets... But, keep in mind, whether it's a strong employment number, an over-zealous Fed, or no discernable catalyst at all, our base case has been all along that the bear market has a bit more growling to do before it makes way for the next bull. Although, as always, we remain open to all possibilities...

Asian equities rallied overnight, with 14 of the 16 markets we track closing higher.

Europe, in response to this morning's US jobs report, with 18 of the 19 bourses trading down, is rolling over as I type.

US stocks are down as well to start the session: Dow down 129 points (0.41%), SP500 down 0.66%, SP500 Equal Weight down 0.55%, Nasdaq 100 down 1.21%, Nasdaq Comp down 1.07%, Russell 2000 down 0.65.

The VIX sits at 21.82, up 1.77%.

Oil futures are up 0.15%, gold's down 1.15%, silver's down 2.29, copper futures are up 1.21% and the ag complex (DBA) is down 0.62%.

The 10-year treasury is down (yield up) and the dollar is down 0.14%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 5 -- oil services stocks, energy companies, base metals futures, financial stocks and carbon credits -- are in the green so far this morning. The losers are being led lower by silver, treasury bonds, Sweden equities, AMD and uranium miners.

More Popper:
"...the true rationalist, never wants to talk anyone into anything. No, he does not even want to convince: all the time he is aware that he may be wrong. Above all, he values the intellectual independence of others too highly to want to convince them in important matters. He would much rather invite contradiction, preferably in the form of rational and disciplined criticism."
--Popper, Karl. All Life is Problem Solving

Have a great day!


  1. Thanks for the market updates Marty! Indeed, the job number today gives Fed the reason to further raise interest rate in September. There is talk in the market with the possibility of 75 basis point.

  2. My pleasure Sam! And, yep, as I type Fed funds futures are now pricing in decent odds of .75 at Sept. meeting