Thursday, September 21, 2023

Morning Note: Messy Setup

Call it, per Bloomberg's Michael McKee, "a unanimous hawkish pause."  Yep, no rate hike at yesterday's Fed meeting, but threats of one by year-end, and projections that show monetary policy staying yet tighter for longer than they thought last time they told us what they thought.

Actors in the Fed fund futures space, however, still ain't quite buying it; as I type they discount a 31% chance of a hike in November, and 23% odds for December... As for cuts next year, the Fed does see their benchmark rate coming in at 5.1% by year-end 2024 (it's 5.5% today), they were forecasting 4.6% last time they met... Futures are currently pricing in 4.6% for the end of next year.

Well, frankly, what a mess!  

Our assessment has recession odds over the coming months uncomfortably high, while all indications from the Fed are that they indeed believe (or indeed have to say that they believe) that they can safely land -- as opposed to crash -- this plane... Powell reiterated that job-1 is getting inflation sustainably under control... That, in essence, we simply can't have the economy we want without sustainably affordable prices -- supporting their commitment to keeping rates higher for longer, with QT (reducing their balance sheet by $94b a month) seeing no end in sight.

In a nutshell, despite the fact that the latest inflation data would've allowed for a hike yesterday, we actually think Fed funds futures traders have a better handle on where the Fed's ultimately headed than does the Fed itself. 

I.e., if recession -- aided by tight monetary policy -- hits over the coming months, the Fed will indeed react, but -- per last week's video update -- we should not expect that to save the market from another leg down... At that point it'll be about what happens to corporate earnings during recession, and what valuations will say about the lofty state of stock prices at the time.

Stay tuned...

Asian stocks got hammered overnight, with 14 of the 16 markets we track closing lower.

Same for Europe so far this morning, with 17 of the 19 bourses we follow trading down as I type.

US equity averages are down to start the session: Dow by 171 points (0.50%), SP500 down 0.93%, SP500 Equal Weight down 0.40%, Nasdaq 100 down 1.01%, Nasdaq Comp down 0.99%, Russell 2000 down 1.13%.

As for yesterday’s session, US equity averages closed lower: Dow by 0.2%, SP500 down 0.9%, SP500 Equal Weight down 0.4%, Nasdaq 100 down 1.5%, Nasdaq Comp down 1.5%, Russell 2000 down 0.9%.

This morning the VIX sits at 16.40, up 8.32%.

Oil futures are up 0.50%, nat gas futures are down 1.90%, gold's down 0.55%, silver's up 0.40%, copper futures are down 2.48% and the ag complex (DBA) is down 1.06%.

The 10-year treasury is down (yield up) and the dollar is up 0.29%.

Among our 34 core positions (excluding options hedges, cash and money market funds), only 1, SLV (silver) -- is in the green so far this morning... The losers are being led lower by Dutch Bros, Albemarle, EWZ (Brazil equities), TLT (long-term treasuries), XME (metals miners) and MP Materials.

"...we’re at the mercy of a few very bright, academically gifted appointees who’ve proven to be most adept at test-taking and, alas, mess-making."   --Yours truly

Have a great day!

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