How Markets Digest "Good News"

I concur with the below from BCA… And I’ll add that the setup described leads to a surprisingly broad misunderstanding among market participants about the interaction between economic conditions and markets… I.e., good economic news can be (often is) bad news for stocks based on what it portends for market-based interest rates and for go-forward monetary policy – particularly in an "inflation focused" environment. 

On the flipside, good news is good news typically when we’re earlier in the cycle -- when earnings expectations are less-robust and rates are not near cycle highs; which is clearly not today.

Notwithstanding -- per the last paragraph from me below -- the likely good-news-boost we'd see were the strait to open tomorrow (since, for the moment, geopolitics utterly dominates market sentiment)... Case in point the market bump that just occurred, literally a I type, on the following headline:   stocks middle panel

Evening Note: Never a Dull Moment!

 "Never a dull moment" is an understatement these days!

In our weekend rundown I hinted that we're exploring hedging some our non-US exposure based on the prospects for central banks tightening policy and the attendant market implications of such a move.

Here's that paragraph:

The Economy Is Growing. Prices Are Growing Faster...

Per the following synopsis, we maintain our view that recession risk remains low, despite a negative PWA Index print.

As you'll note below, there are real positives in spots among the data, while the inflation picture is nothing but negative... On net, this is that stagflationary risk we've been signaling for months.

As I've mentioned in virtually every client review of late, if we're having the same geopolitical conversation six months from now, we will likely have made notable adjustments along the way... Thus far, as you've gleaned from the volume of transaction confirmations of late, we're already actively adjusting at the margin.

While we're sitting right near our year-to-date peak, representing a very nice four-month gain in our core portfolio -- validating our overall strategy thus far -- Friday was nevertheless a rough day, as global equity, currency, and commodity markets suddenly cared about rising yields (read inflation risk), and are, thus, legitimately beginning to wonder if indeed a Hormuz resolution is at hand.

Here's your thorough weekly rundown:

Morning Note: China Talks Disappoint

The last paragraph in the rundown below does a good job describing the action among our core positions this morning.

The bottom line in terms of today's global selloff, also covered below, is the lack of any official message out of this week's US/China talks suggesting China is stepping in to assist in resolving the Iran situation... That'll no doubt at some point change if the Strait of Hormuz is not opened sooner than later.

We'll have a thorough macro update for you over the weekend.

In the meantime, here's this morning's rundown*:

Morning Note: The Goal

Following up on yesterday's hot CPI print, markets are wrestling with a scalding hot PPI (producer prices) report this morning.

Here's from Bespoke Investment Group's morning note:

"Headline PPI surged 1.4% - not y/y but m/m while the core reading surged 1.0% versus estimates for an increase of just 0.3%. The headline index was only forecast to increase 0.5%. PPI tends to be more volatile than CPI, but these numbers are hot, hot, hot. As you would expect, the immediate response in the futures market was for yields to spike higher while equities erased half of their pre-release gains."

We've maintained all along that the goal of the President's China trip this week is to come away with a warm embrace and all (or some) manner of win/wins on trade, etc... That's the goal anyway, and the following on the International Energy Agencies latest Oil Market Report* just adds additional incentive to that aim.

Morning Rundown

Virtually all things that have been working of late are taking quite the hit this morning. Oil importing regions and US tech stocks in particular.

Thus, days like these are ones we feel, given our current allocation… That said, clients, as you’ve noticed, we’ve been notably active of late... This morning, in fact, we reduced our US tech exposure by 30%, adding to US healthcare, financials, and communication stocks with the proceeds… The move essentially amounts to a rebalancing (a bit) away from an overextended area into notably under-appreciated sectors that have actionable theses in and of themselves.

Here’s this morning‘s macro rundown*:

K-Shaped YOLO

In yesterday's commentary I referenced the literally rock-bottom (all time low) state of consumer sentiment, per the UOM survey that began in 1952.

Now, allow me to turn that thought completely on its head and offer up last week's earnings call highlights from the venues that you'd think would be suffering mightily -- given how consumers reportedly feel about their current state of financial affairs (HT Peter Boockvar):

Macro Update: Think Again

Per our PWA Index summary below, the economy is sending very mixed signals:  The labor market remains relatively strong while consumer sentiment is literally in the gutter (blame inflation)... Business sentiment still reads expansion, however "input costs are rising sharply."

If you haven't had a chance yet, be sure to read my commentary from last Monday titled How Long Can the Economy Hold Up?  It will give you some insight into why the greatest oil supply disruption in history has yet to tilt the scale toward a US recession.

And if you're thinking -- like so many clearly are -- that once the Strait of Hormuz is back in business; that things (read oil prices) will return to normal, be sure and read Thursday's Quotes of the Day post, where I highlight Exxon's earnings call.

Also, alas, if you're thinking that this is all about just oil, you have to think again... Co-founder of the highly respected macro research firm Gavecal, Louis Vincent Gave, was on the MacroVoices podcast this week pointing out the following.

Quotes of the Day

On top of what I mentioned in last weekend's commentary,

"We maintain that a Mid-East resolution coming soon would likely give quite the boost to animal spirits, one that markets would initially cheer... The underlying inflation dynamic, however -- being a structural affair in our view -- will no doubt keep us on our toes going forward."

-- key phrase being "inflation being a structural affair," -- the following from Exxon's earnings call this week bolsters our view (HT Peter Boockvar):   emphasis mine...

Morning Note: Ferocious

As I type this morning, 45 minutes before the market open, equity and commodity futures are being traded, I'll say, ferociously... 

Here are the obvious market moving headlines:

• Iran's Revolutionary Guard's Navy, with the end of "threats from aggressors" and in light of new procedures, safe and stable transit through the strait will be possible - State Media
• US & Iran closing in on one-page memo to end war - Axios

Now, while "ferociously" does not necessarily mean ferociously higher -- particularly when we're talking oil, gas and ag futures, and related equities (they're tanking) -- the major averages being up close to 1% in the pre-market is nothing to sneeze add... It's the transaction volume that appears ferocious on my screen; suffice to say that traders are scrambling this morning… Other notables left out of the pre-market party are US consumer staples, utilities and healthcare -- call it rotation into growthier stuff.

How Long Can the Economy Hold Up?

I've fielded a number of questions over the past few weeks over the impact of higher oil prices (how long can the economy hold up?), as well as unsolicited comments over how the current shock is markedly worse vs the early-70s crisis, and how it ultimately has to end very badly -- economically-speaking.

With regard to the 70s, it's important to note that the economy's dependence on oil today is not remotely near what it was back then. 

And combine that -- per the following -- with the fact that the US is a net "energy" (not crude oil, btw) exporter, and that oil itself today supplies notably less of the world's energy needs vs back in the 70s:

Structural Shifts Since Then — The Three Big Changes

Your Weekly Wrap

Per the summary below, while our PWA Index score remains negative, the underlying dynamics are notably mixed.

While the inflation and inflation expectations reads are -- or should be -- a serious drag on general conditions, the labor market continues to hold up remarkably well... The consumer -- despite abysmal sentiment readings -- seems to be hanging in there, although they're doing so at the expense of their savings (the rate now down to the lowest in 18 years). I.e., they're not panicking just yet, they're instead saving less in order to keep up their spending -- while paying ever-rising prices.

We maintain that a Mid-East resolution coming soon would likely give quite the boost to animal spirits, one that markets would initially cheer... The underlying inflation dynamic, however -- being a structural affair in our view -- will no doubt keep us on our toes going forward.

Here's your weekly read*: 

Morning Note

This headline caught my attention yesterday:

"Iran's President Pezeshkian and Iran's Parliament Speaker Ghalibaf are dissatisfied with the manner in which diplomacy is being conducted, particularly the nuclear negotiations, by Abbas Araghchi, and are calling for his dismissal - Iran International, citing two informed sources."

I then said this in our internal chat:

"I woke up this morning thinking that re-escalation is highly likely, imminently, for obvious (headline) reasons... The above however is telling; if true, Iran could be close to rolling over on the enrichment standoff... That would do the trick."

Then we get this today:

"Iran handed new proposal to Pakistani mediators to end the US-Iran war, contents unclear."

While that last headline sorely lacks detail, oil rolled over (down 3% as I type) on its release... Suffice to say that the market sees Iran submitting terms, amid the US's firm stance on uranium enrichment, as potentially significant... Time will tell.

In the meantime, here's your brief morning rundown*... I'll have much more for you on the macro front over the weekend: