Thursday, January 5, 2023

Morning Note: Maybe a Little Lalalandesque-Thinking Right Here

Suffice to say that the equity market welcomed the following from yesterday's release of the December ISM Manufacturing Survey:
“The December Manufacturing PMI® registered 48.4 percent, 0.6 percentage point lower than the 49 percent recorded in November. Regarding the overall economy, this figure indicates contraction after 30 straight months of expansion. The Manufacturing PMI® figure is the lowest since May 2020, when it registered 43.5 percent."
"The two manufacturing industries that reported growth in December are: Primary Metals; and Petroleum & Coal Products.
The 13 industries reporting contraction in December, in the following order, are: Wood Products; Fabricated Metal Products; Chemical Products; Paper Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Furniture & Related Products; Apparel, Leather & Allied Products; Computer & Electronic Products; Machinery; Food, Beverage & Tobacco Products; Transportation Equipment; and Miscellaneous Manufacturing.
Commodities Up in Price
Copper; Electrical Components (2); Electricity (2); Electronic Components (25); Freight*; Labor — Temporary (4); Semiconductors; and Zinc.
Commodities Down in Price
Aluminum (8); Aluminum Products; Corrugate; Crude Oil; Diesel; Freight* (2); Natural Gas; Ocean Freight (4); Plastic Resins (7); Polyethylene; Polypropylene (5); Solvents; Steel (8); Steel — Cold Rolled; Steel — Hot Rolled (8); Steel — Stainless Steel Products; Steel Bars; and Steel Products (6).
Yep, that's right, a weakening economy with the majority of manufacturing commodity inputs declining in price is music to the bulls' ears!

Why so?

Well, good question! I mean, wouldn't you think that a weakening economy and falling prices (think of the producers of those inputs) actually spell bad news for corporate earnings? 

Indeed, but if it gets the Fed's attention and has them abruptly turning dovish, perhaps they can avert recession as interest rates fall, creating quite the bullish setup for a market that just got taken to the woodshed.

The problem, however, being, if the bulls are thinking the Fed's about to pivot, the minutes from the December policy meeting says they better think again:
"In discussing the policy outlook, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives. In determining the pace of future increases in the target range, participants judged that it would be appropriate to take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. With inflation staying persistently above the Committee's 2 percent goal and the labor market remaining very tight, all participants had raised their assessment of the appropriate path of the federal funds rate relative to their assessment at the time of the September meeting. No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023."

Clearly, a bullseye for them is the labor market:

Participants observed that the labor market had remained very tight, with the unemployment rate near a historically low level, robust payroll gains, a high level of job vacancies, and elevated nominal wage growth.  
Participants cited the possibility that price pressures could prove to be more persistent than anticipated, due to, for example, the labor market staying tight for longer than anticipated

...participants agreed that inflation remained well above the Committee's longer-run goal of 2 percent, while the labor market remained very tight, contributing to upward pressures on wages and prices.

And, ironically, employment is one of only two areas presently showing growth in the December ISM Manufacturing Survey referenced above:

So, couple a still-strong labor market with "No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023" from the Fed's December meeting minutes, and one could conclude that the market's living in Lalaland right here.

Now, that said, I totally get it... And, frankly, I totally agree that odds are far higher than zero that the Fed will pivot to easy policy sometime in 2023, despite what they stated during their last meeting.

Thing is, I don't think that happens without a recession and without an accompanying notable decline in stock prices, as earnings underdeliver versus presently priced-in expectations… So, even though I agree that the Fed may indeed pivot this year, I don’t know that the bulls understand what it’ll take to make it happen.

Stay tuned...

Asian stocks leaned green yet again overnight, with 11 of the 16 markets we track closing higher.

Europe's red so far this morning, with 13 of the 19 bourses we follow trading down as I type.

US stocks rolled over this morning on, yep, the release of a stronger than expected ADP jobs report and lower than expected weekly jobless claims: Dow down 364 points (1.09%), SP500 down 1.12%, SP500 Equal Weight down 1.15%, Nasdaq 100 down 1.30%, Nasdaq Comp down 1.28%, Russell 2000 down 1.46%.

The VIX sits at 22.68, up 3.10%.

Oil futures are up 0.56%, gold's down 1.10%, silver's down 1.92%, copper futures are up 1.84% and the ag complex (DBA) is down 0.85%.

The 10-year treasury is up (yield down) and the dollar is down 0.03%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 5 -- Brazil equities, base metals futures, oil services stocks, energy stocks and Mexico equities -- are in the green so far this morning. The losers are being led lower by Dutch Bros, cyber security stocks, silver, AMD and materials stocks.

Per the following, prediction is a tough business, particularly when it comes to markets and economics and, apparently, medicine:
“…when it comes to judgment under uncertainty—a key component of real-world decision-making—expertise confers a less-clear advantage, even in fields like medicine, where one might suppose it essential.”

--Tetlock, Philip E.. Expert Political Judgment (p. xxii). Princeton University Press

Have a great day!

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