I heard a thousand blended notes,
While in a grove I sate reclined,
In that sweet mood when pleasant thoughts
Bring sad thoughts to the mind.
To her fair works did Nature link
The human soul that ran through me ran;
And much it grieved my heart to think
What man has made of man.
The budding twigs spread out their fan,
To catch the breezy air;
And must think, do all I can,
That there was pleasure there.
If such be Nature's holy plan
What man has made of man?
- William Wordsworth, 1798, Lines Written in Early Spring (excerpt)
On The Road
President Biden travels to Europe on Wednesday (today). His docket is packed for Thursday when the president joins summits with leadership from NATO, the Group of Seven, and the European Union. The plan? To show a unified front, a resolve across the alliance, across the planet's more developed economies and across the continent against the actions taken by the Russian military, by the Putin regime in and against Ukraine. On Friday, the president heads to Poland, which in this case is NATO's front door, and meets with U.S. troops deployed there as well as those working on the humanitarian crisis. The U.S. will announce increased assistance for refugees fleeing Putin's forces in Ukraine and for those caring for them.
As the war in Europe completes its first full month, the allied response has been punishing, but has not been a deterrent. There will be effort to get all of the balls at least starting to move in the same direction. The U.S. has banned all Russian energy commodity imports, while Canada and the UK have banned Russian oil. Other NATO nations, such as Germany, have been slow to act as they had under previous administrations, allowed themselves to become dependent upon Russia for energy.
Now, they will have to wean themselves off of Russian oil and natural gas while investing in the kinds of infrastructure required to receive commodities such as liquified natural gas purchased from nations such as the U.S. or Australia via marine transport. The expectation for this week is that the Biden administration will announce new sanctions against up to 400 Russian individuals including 328 members of the Russian State Duma (The lower house of Russia's legislative branch of government) along with some Russian elites not already targeted by prior sanctions. This move will be coordinated with simultaneous actions taken by other allied nations.
U.S. national security adviser Jack Sullivan, on Tuesday... said "The president will join our partners in imposing further sanctions on Russia and tightening the existing sanctions to crack down on evasion and ensure robust enforcement." Sullivan did not go into deep detail.
Along those lines, the Dallas Fed released a report authored by staff economists Lutz Kilian and Michael Plante. The report gets its point across quite bluntly..."If the bulk of Russian energy exports is (are) off the market for the remainder of 2022, a global economic downturn seems unavoidable. This slowdown could be more protracted than that in 1991." The report goes on..."Unless the Russian petroleum supply shortfall can be contained, it appears necessary for the price of oil to increase substantially and to remain elevated for a long period to eliminate the excess demand for oil. This demand destruction is likely to be assisted by the recessionary effect of higher natural gas prices and other commodity prices, especially in Europe."
That's really what U.S. markets are trying to price in. Broader than the impact of reduced Russian energy commodity exports, the target has become the pace of consumer level inflation and the central bank's ability to curtail that acceleration through the removal of liquidity while increasing the cost of money. This, with the tools at hand can, in my opinion, only be done by intentionally causing said demand destruction which will certainly slow economic activity. There is no doubt that the monetary base had become too large, that the cost to borrow had been artificially skewed for far too long, and the behavior goes back decades. The pandemic might have been the catalyst for recent monetary posture, but the inclination to lean on fiscal means supported through monetary policy is old hat.
Time to pay the piper? Just who is the piper, and how long, how deep will the piper's needs be? Probably longer than will the political will of a nation addicted to easy money. Still, there will be an attempt made, and the effort appears likely to be robust... for now. On Monday, Fed Chair Jerome Powell said, "We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so." Powell will speak again this morning, and might be speaking by the time you read this.
Powell had back-up on Tuesday. Cleveland Fed Pres. Loretta Mester, who is a Sarge fave, said, "Based on my current outlook and my assessment of the risks to the outlook, I believe it will be appropriate this year to move the target range of the fed funds rate up to its longer-run level, which I estimate to be about 2.5%, and to follow with further rate increases next year." Elsewhere, St. Louis Fed Pres. James Bullard, who is often aggressive but quite pragmatic in his approach and dissented from the 25 basis point rate hike on March 16th in favor of a 50 basis point hike, spoke. Bullard said, "The Fed needs to move more aggressively to keep inflation under control, we need to get to neutral at least so we're not putting upward pressure on inflation during this period when we have much higher inflation than we're used to in the U.S."
Both Mester and Bullard are voting members of the FOMC this year. Dallas does not vote again until 2023.
Treasury securities for the most part sold off on Tuesday, as the US Ten Year Note paid as much as 2.41% overnight while the US Two Year Note paid more than 2.19%. Buyers have moved into Treasuries later on as night rolled into morning. These two yields dropped to 2.36% and 2.12%, respectively. At zero dark-thirty, the US Ten Year remains inverted versus the US Seven Year, US Five Year and US Three Year Notes. The yield spread between that Ten Year Note and the US Two Year Note still runs at a rough 20 basis points while the yield spread between US Thirty Year paper and the Five Year stands at about 22bps.
WTI Crude appears to be somewhat weaker this morning, now well off of Monday's highs, and Gold appears to be rallying off of Tuesday's lows... all as the US Dollar Index continues its gradual climb toward making another run at the 99 level.
Turning to equities, both the S&P 500 and Nasdaq Composite turned in their fifth positive session in six trading days on Tuesday. Key to note here (as we discussed 24 hours ago), the S&P 500 took back its 200 day SMA as the index gained 1.13% for the day...
... and the Nasdaq Composite took back its 50 day SMA as that index scored a 1.95% upside move.
What this does in normal times is force some managers off of the sidelines and into these markets. With a Fed poised to necessarily be more aggressive, the situation in Europe only worsening, and domestic economic growth becoming less sure all the time, not to mention that the indexes have been hot, I recognize market conditions. I count on nothing. These broadest large-cap indexes are both "sort of" coming off of sloppy double bottom reversals as well.
Consider that U.S. equities may be benefitting, as odd as it may sound, from a global perception of haven. Crazy as monetary policy tightens, liquidity is set to drain, and the dollar strengthens? Maybe the cleanest shirt in a dirty hamper type of thing. Beauty is in the eye of the beholder. Who knows what is beheld, by whom it is beheld, and what they behold at home? Okay, we do kind of know that stuff.
With the exception of the fact that aggregate trading volumes were lower on Tuesday than on Monday, which could in retrospect be a big thing, breadth was sweet. Winners beat losers at the NYSE by 5 to 3, and at the Nasdaq by about 5 to 2. Advancing volume took a 70.4% share of composite NYSE-listed trading and a 79.6% share of this same metric for Nasdaq-listed names. Ten of the 11 S&P sector SPDR ETFs closed Tuesday in the green, led by the cyclicals and growth. The outlier was Energy (XLE) , which is in normal times, a cyclical sector. Right now, I am not sure how cyclical it is. Energy gave up 0.74% on Tuesday, while Consumer Discretionaries (XLY) and Communication Services (XLC) were the strongest, up 2.48% and 1.87%.
- Nvidia (NVDA) ... CEO Jensen Huang gave his keynote address at the firm's investor day, which came on the second day of GTC 2022. The firm revealed more products, both in the hardware and software space than I can even begin to put into writing in a non-Nvidia centric piece. Safe to say, that the leader in cutting edge CPU/GPU technology is still the leader. Get used to the term "Digital Twins" as that is what you will have in the Metaverse/Omniverse. Why did NVDA sell off 0.79% as the Philadelphia Semiconductor Index rallied 0.66%? Valuation? A chance to take short-term profits?
Perhaps NVDA is merely hitting resistance at pivot. On Friday in the Doug Kass Diary, I posted a similar chart identifying NVDA's pivot as it's 50 day SMA and that spot has acted as a catalyst/catapult, so there is merit to that thought. However, what if I misplaced my pivot. What if the action this year has created another sloppy double bottom reversal? Then pivot would be $269 and that would be a whole new ballgame, technically. That would make my target price $323 (up from $292), while leaving my $235 panic point of $235 (representing a break of the 200 day SMA) right where it is.
- Tesla (TSLA) ... To think, I was this close >< to being shaken out in TSLA back on February 24th. Seriously, I had the order teed up. Something allowed me to "not panic" but it wasn't discipline. At the $700 low, my 8% rule had been triggered. I actually failed to follow my own doctrine on this one. Thank goodness. Tesla officially opened its Berlin, Germany facility on Tuesday, as CEO Elon Musk showed up to personally deliver the factory's first 30 Model Ys. Eventually, the factory could expand production to 500K vehicles on an annual basis, but not yet due to supply chain issues.
Readers will note that TSLA, with that 7.9% run on Tuesday, broke out of my Pitchfork model with gusto. The stock could hit some resistance right here as it runs into a minor volume shelf. What I see forming, but is not quite there just yet is potentially a cup pattern that began with the start of the year. Currently that would place the pivot at $1208, which is the apex at the left side of the cup. Should at some point a handle be added to the still developing cup, that pivot would shift to the right side of the cup apex and perhaps be something more immediately tradable.
Economics (All Times Eastern)
10:00 - New Home Sales (Feb): Expecting 813K, Last 801K SAAR.
10:30 - Oil Inventories (Weekly): Last +4.34M.
10:30 - Gasoline Stocks (Weekly): Last -3.616M.
10:30 - Natural Gas Inventories (Weekly): Last -86B cf.
13:00 - Twenty Year Bond Auction: $16B.
16:30 - API Oil Inventories (Weekly): Last -86M.
The Fed (All Times Eastern)
08:00 - Speaker: Federal Reserve Chair Jerome Powell.
11:45 - Speaker: San Francisco Fed Pres. Mary Daly.