Friday, December 9, 2022

Morning Note: A Virtual Tossup for the Short-Term Equity Market Setup

Last evening's log entry:

Tomorrow’s PPI number, and next week’s CPI print – while some of the data suggest they could very well come in soft – with regard to equities, it’s all about how they score relative to expectations, and the extent to which traders have price in the consensus bias ahead of time.

As for next week’s Fed meeting, I see it — in terms of market impact — as a virtual tossup at this point… Powell surprised me at his recent Brookings appearance – he softened his tone markedly and stocks loved it… He may very well feel inclined to bring back a little tightness by emphasizing that, while they indeed slowed the pace (they’re definitely going .50%, vs the .75% that was all priced in a few weeks ago), persistent inflationary pressures (in the wage numbers in particular) will likely have them holding rates at a relatively high level for notably longer than fed funds futures – and stocks – are presently pricing in.

So, if indeed Powell comes in tight during his post-meeting presser, stocks will take a hit, especially if softish inflation data has them ramping higher into the meeting… If, on the other hand, he simply picks up where he left off at Brookings last week, that proverbial Santa Claus rally will be looking pretty good!

From a purely technical perspective, however, I see multiple layers of resistance just above present levels…

In any event, between here and year-end (a historically-good period for stocks) – while indeed stocks may trade lower – I, for the moment, don’t anticipate the kind of bear market washout I think odds presently favor early next year…

Well, it's now tomorrow, and the PPI number (thanks to service sector inflation) came in above expectations -- within a minute of the announcement S&P 500 futures went from up 0.50% to down 0.72%. 

Asian equities rallied overnight, with 12 of the 16 markets we track closing higher.

Pretty much the same for Europe so far this morning, with 12 of the 19 bourses we follow trading up as I type.

US stocks are leaning red to start the session: Dow down 109 points (0.32%), SP500 down 0.46%, SP500 Equal Weight down 0.41%, Nasdaq 100 down 0.76%, Nasdaq Comp down 0.72%, Russell 2000 down 0.55%.

The VIX sits at 22.81, up 2.33%.

Oil futures are up 1.01%, gold's up 0.44%, silver's up 1.10%, copper futures are down 0.37% and the ag complex (DBA) is flat.

The 10-year treasury is down (yield up) and the dollar is up 0.11%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 11 -- led by silver, Nokia, Vietnam equities, Sweden equities and uranium miners -- are in the green so far this morning. The losers are being led lower by AMD, treasury bonds, Dutch Bros, Amazon and Mexico equities.

Beyond short-term dynamics, we believe structural shifts -- per the quote below -- will ultimately spell higher long-term inflation than folks have grown accustomed to these past few decades:
"...globalisation in the guise of enhanced cross-border flows of goods and services, the migration of people, and capital flows is under increasing political threat as resurgent nationalism becomes politically more popular."

--Goodhart, C. A. E.. The Great Demographic Reversal 

Have a great day!


  1. I believe in your analysis and do see a lot of upside resistance. Fed Powell is unique in his own way. He is a drifter that moves all over the place. He is not a typical Fed Chairman who is historically pretty predictable. Fed Powell is hawkish at Jackson Hole and now is dovish and maybe hawkish again next week (LOL. Are we dealing with a bipolar? :).
    Overall, we are still in a Bear Market and many bankers this week are extremely bearish and are predicting a recession next year. In my opinion, inflation will eventually get stuck at 4% level next year and will be very difficult to move to 2% as Fed Powell wants.

    1. I don't disagree with your view of Powell, in general. To be fair, we have seen inflation trends, in goods in particular, come off the boil a bit, so some softening of tone isn't too big a surprise...

      His history has been to get easily spooked by markets... Of late there's been a pretty high level warning of off-balance sheet risks of not-small proportion that could spell a bit of trouble, particularly in currencies (which would reverberate across assets should things begin to freeze up)... I think it's clear that that has the Fed's attention right here as well... That said, I personally believe that those risks have been significantly overstated right here!

      With regard to longer-run inflation, I totally agree that 4% is a legitimate long-term target... If, however, the bankers (and our analysis) are correct, it's very likely that during a recession we'll see inflation plunge, could very well go negative for a stretch... But, as I've suggested herein several times, as we emerge, those structural inflation forces come roaring right back, making life very difficult for the Fed going forward..

      Have a nice weekend Sam!

    2. Thanks Marty! I like your thinking and you always think outside the box. Thanks for the contrary view. Take Care! Have a great weekend!