Tis' The Season?
Or is it maybe something else. Many of us who write and speak about financial markets have gone on and on about market seasonality. Makes sense. Most traders and investors are well aware that September is historically the weakest month of the year for the major US equity indexes. August does not have the best reputation either. October is known if not for consistent weakness, at least for its volatility. November is when many feel the waters calm once again. At least that's when the flow of capital into year's end seems to start working its way back into equity markets on a more regular basis.
The truth is that while markets have felt pressure, the indexes continue to hang around levels not really so very far from their semi-recent tops. The S&P 500 gave up 1.77% in August and is off another 1.02% in September so far. Yet, the S&P 500 still stands up 16.21% year to date. The moves have been more extreme for the Nasdaq Composite. That index still stands up an impressive 31.6% year to date, despite closing on Tuesday night down 1.86% month to date in addition to the 2.17% surrendered in August.
Is this "just" seasonality at work? Is this something perhaps more significant? Possibly more persistent? Treasury yields have rapidly moved higher. This puts short-term debt securities in direct competition for capital flow. The US dollar has been stronger. Even so, oil prices have moved higher, forcing energy pricing to put upward pressure on headline level consumer inflation. I have seen front month WTI Crude futures trading in the mid-$89's overnight. Since the start of August, on a continuous contract basis, WTI Crude is up a rough 11%. Since the start of July, light, sweet crude is up close to 26%.
This has to be inflationary well beyond mere energy prices as inflated prices for fuel pressures margin across all goods producing businesses as well as any business involving travel and/or delivery. The overt fear is that headline and then core inflation reaccelerates. This forces more and more organized demand for increased wages. We see this at present with the auto workers, but the same relationship between labor and management where organization is involved, exists up and down the economy.
Expectations for short-term rate cuts earlier rather than later have been a pillar of support for equities. This really was the impetus for the March into July market rally. First with the regional banking issues that came to a head in March, and then "appeared" to dissipate... only to be followed by mid-year economic growth that surprised to the upside, the reasons that would force the FOMC to pull rate cuts forward also dissipated. Now, it is consumer level inflation that threatens to surprise, and not in a good way.
August CPI on the Way
The numbers hit the tape at 08:30 am ET this morning. Core CPI excludes food and energy prices, and does include a dated, and therefore incorrect, input for shelter. This metric is expected to show further improvement for August. Economists are looking for month over month growth of 0.2% for a second straight month. Shelter was responsible for nearly the entirety of what consumer level inflation there was in July.
This input is expected to have started to soften at least a little bit on the rent side. Given the lag in this entry specifically, we know that shelter will now artificially suppress core CPI over the next few months as it had artificially exaggerated the data earlier this year. On a year over year basis, August Core CPI is seen slowing to growth of 4.3% from 4.7% in July. This would be the tenth year over year contraction for this metric in the past 11 months if accurate.
Headline August CPI should present as more of a problem, as economists tend to ignore food and energy prices due to their volatility. Consumers do not have that kind of optionality. Consensus view for headline August CPI is for month over month growth of 0.6%. This would be the hottest month over month print for this metric since June 2022. The year over year headline print for August is seen at growth of 3.6%. This would be the second consecutive monthly increase for this series after having experienced 12 consecutive months of decelerating year over year inflation that came to its nadir in June.
Currently, the Atlanta Fed's GDPNow model still shows third quarter economic growth at 5.6% q/q, SAAR. This number will not be revised this morning, but will be updated tomorrow morning after August Retail Sales and July Business Inventories both cross the tape.
Going into this morning's numbers, Fed Funds futures markets still show a 93% probability for no rate change on September 20th and a 56% probability that the FOMC is done raising rates for this cycle. These markets are also pricing in a 59% chance for a rate cut by June 2024 and a 98% likelihood for at least one rate cut at any point in 2024. These probabilities will move almost instantly upon the release of the August CPI and will directly impact equity prices.
Economic Underperformance
The economy is roaring, "they" say. You sure? Certainly not at the household level. The Census Bureau released that agency's annual reports on income, poverty and health insurance coverage on Tuesday. Real median household income dropped 2.3% in 2022 to $74,580. 2022 was the third consecutive year of annual declines for this metric and the 2.3% decrease made 2022 the worst year for real US median household income performance since 2010.
The official US poverty rate dropped to 11.5% in 2022 from 11.6%. This rate is calculated pre-tax and excludes things like stimulus payments and tax credits. The Supplemental Poverty Measure or "SPM", is considered by many economists to be the actual poverty rate, and is calculated post-tax, while including government transfer payments. The SPM increased to 12.4% in 2022, up significantly from just 7.8% in 2021. This is the first annual increase in the SPM since 2010.
The SPM child poverty rate - better sit down for this one - increased from 5.2% in 2021 to 12.4% in 2022. In America.
Solid Auction
The US Treasury Department "raffled off" $35B worth of new Ten Year paper on Tuesday afternoon. While not spectacular, the results were probably better than feared. The auction priced at a high yield of 4.289%, up 29 basis points from the July Auction and the highest high yield since the November 2007 auction, but what did you expect?
Bid to cover printed at 2.52, which is above the six month average. Indirect Bidders (foreign accounts) took down 66.3% of the issue, also above the six month average, while Direct Bidders were awarded 19.9%. This left dealers "stuck" with 13.8% of the auction, which is in line with that six month average. Treasury steps to the plate with $20B worth of new Thirty Year Bonds this afternoon.
BofA Survey
The Bank of America released that firm's latest global fund manager survey on Tuesday. The poll, conducted from September 1st through September 7th...
- Showed equity allocations up 7 percentage points from the month prior to net underweight 3%.
- Showed bond allocations down 6 percentage points from the month prior to net underweight 1%.
- Showed cash allocations up 7 percentage points from the month prior to net overweight 27%.
Largest tail risk: High inflation keeping central banks hawkish.
Most crowded trades: Long big tech, Short China.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 7.21%.
07:00 - MBA Mortgage Applications (Weekly): Last -2.9% w/w.
08:30 - CPI (Aug): Expecting 0.6% m/m, Last 0.42 m/m.
08:30 - Core CPI (Aug): Expecting 0.2% m/m, Last 0.2% m/m.
08:30 - CPI (Aug): Expecting 3.6% y/y, Last 3.2% y/y.
08:30 - Core CPI (Aug): Expecting 4.4% y/y, Last 4.7% y/y.
10:30 - Oil Inventories (Weekly): Last -6.3076M.
10:30 - Gasoline Stocks (Weekly): Last -2.666M.
13:00 - Thirty Year Treasury Bond Auction: $20B.
14:00 - Federal Budget Statement (Aug): Last $-221B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CBRL) (3.97)
After the Close: (SMTC) (.02)
