I Can See for Miles (excerpt)
Well, here's a poke at you
You're gonna choke on it too
You're gonna lose that smile
Because all the while
I can see for miles and miles
I can see for miles and miles
I can see for miles and miles and miles and miles and miles
- Peter Townsend, The Who, 1967
Tea Leaves & Sledgehammers
Sometimes Fed watchers read through the Beige Book, go over the release of each and every macroeconomic data-point, go over the Fed Minutes and listen/read when Fed officials make public appearances. Yes, we seek out any hint of future changes in the trajectory of monetary policy. Often, it's almost like reading tea leaves as central bankers quite understandably, while trying to signal intent, commonly leave space for optionality as economic reality output related to any numbers of inputs evolve through the interpretation of aggregate human response.
Then there are other, rarer times... when the Fed wants so badly to signal intent that in public appearances they come right out and tell investors, traders and citizens just what lies ahead. That's when they bring the sledgehammer. On Tuesday, Fed Governor Lael Brainard, who awaits Senate confirmation as Jerome Powell's new Vice Chair, not only brought the hammer, she became the hammer. The sledgehammer. With the sledgehammer, from an equity and debt markets perspective, comes the "ugly stick". That "ugly stick" was out and about on Tuesday, and the stick put a dent in everything it touched.
That pressure never let up over the balance of the trading session, has worked its way through Asian and European markets and has put US equity index futures markets on the hot seat overnight. Does all of this mean that Wednesday's child will shed the tears of woe? You tell me. Did Tuesday's child display much grace? If human beings still controlled the point of sale, I would say that there could be some day to day overhang, and yes... the trajectory of policy will undoubtedly deeply impact the flow of capital over weeks, months, and years.
Day to day though? As Doug Kass likes to say, these markets have no institutional memory. High-speed keyword reading algorithms are designed to race each other to the point of sale and to try to force overshoot. That makes anything possible on a short-enough time line. Even in this new age. The age of the sledgehammer.
She Said, She Said
It was not that what Lael Brainard said could really surprise. We all know that February CPI hit the tape at an annual growth rate of 7.9%. The Bureau of Labor Statistics will publish March CPI this coming Tuesday. Expectations are for a headline number that comes with an eight handle. Some of the alarmists out there are talking up the possibility of seeing a number that starts with a nine. No, it was not what Lael Brainard said that surprised. We all know that over the medium to longer term, the FOMC must choose what they see as the lesser of two evils... "too hot" consumer level inflation or "too cold" economic activity. It was who said it.
Kansas City Fed Pres. Esther George, who is a voting member of the FOMC this year, also spoke on Tuesday. In a sit-down interview with Bloomberg's Mike McKee, George said, "I think if you just look at where we are today, you might say we will have to go above neutral to bring inflation down. But, there is a long-time between now and the end of the year to see how the economy unfolds." George, who by many is considered to be "Queen of the Hawks", sounded almost patient. George also said... "I think 50 basis points is going to be an option that we will have to consider, along with other things. We have to be very deliberate and intentional as we remove this accommodation. I am very focused on thinking about how the balance sheet moves in conjunction with policy rate increases." Hmm... George told us exactly what she thinks lies ahead on May 4th. Barely noted by the financial media.
Now, when Brainard says... "It is of paramount importance to get inflation down," and "Accordingly, the committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as the May meeting."... It does stop investors in their tracks, as Brainard, ideologically, is considered to be on the opposite end of the spectrum from Esther George.
If George is the "Queen of the Hawks'', then Brainard would be the "Queen of the Doves", and if the Queen of the Doves has turned hawkish, then one must accept that the FOMC is probably very close to being quite aggressive and being so aggressive quite unanimously. In plain English, we have been told that interest rates are going higher and the monetary base is about to shrink, and that both of these policy tightening tactics will be implemented quickly, perhaps more quickly than either Wall Street nor Main Street is mentally prepared for.
Like It Was Yesterday
Remember what Fed Chair Jerome Powell told us last month? Powell said that central bankers had made "excellent progress" on the balance sheet and that the parameters of any likely "quantitative tightening" schedule would come out in the Minutes. Well gang, the Minutes of the March 16th FOMC policy decision will be released this afternoon. Sometimes the Minutes, as they contain nothing but three week old information, are cast aside by traders and investors as one might toss aside a stale slice of bread. Not today, kids. Today, the Minutes matter as much as they ever have.
God of Thunder
The impact on financial markets was profound. The US Ten Year Note paid just 2.41% late Monday. This morning I saw 2.63%. Even with the sharp rise in that yield, US Ten Year paper remains inverted against the Seven Year, Five Year, and Three Year Notes. However, at least for now, the yield of the Ten Year has "un-inverted" versus the US Two Year Note. Oh, traders sold the US Two Year as well, just not to the degree that they sold everything else. The US Two Year Note also paid as little as 2.41% on Monday. I saw that product yielding 2.56% early Wednesday morning. Of course, the US Dollar Index spiked as well.
On the equity side, it was ugly. The Dow Transports suffered another terrific beating, surrendering 2.81% for the session. That index is now down 9.9% over the past five regular trading sessions. The Nasdaq Composite closed below the lows of Monday's more upbeat session, once again failing to retake its 200 day SMA, and giving up 2.26%. The broader S&P 500 took a 1.26% beat-down, while the mid-cap and small-cap indexes underperformed for the day. It should be no surprise that seven of the 11 S&P Sector-Select SPDR ETFs closed in the red on Tuesday, with Energy (XLE) , Technology (XLK) and Discretionaries (XLY) leading the way lower. It should also not surprise that the four sectors that were able to hold their ground on Tuesday were the four "defensive" sectors.
Losers beat winners at the NYSE by roughly four to one, and at the Nasdaq by almost three to one. Advancing volume comprised 22.5% of composite trading of NYSE-listed names and 20.9% of composite Nasdaq-listed stocks. While aggregate trading volume did expand on Tuesday from Monday for stocks listed at both of New York's primary exchanges, and that does count as professional distribution, that volume was by no means... heavy. Does that mean the pros still have to move significant inventory? Or, does this mean that they remain unconvinced? Aggregate trading volume did increase on Tuesday from Monday for constituent names of both the S&P 500 and Nasdaq Composite as well. That said, in neither case, did volume even come close to matching the 50 day trading volume 50 day SMAs for those indexes.
How To Proceed
That the environment has changed. Individuals can not change the big picture. Be pragmatic. Sometimes anticipation is impossible. Recognition of trend will not be.
No "if onlies", no "shoulda", "no woulda", no "coulda"... See both threats and opportunities in real time. Recognize all avenues of approach, and determine for yourself, on what ground you will make your defense. Know thyself. Know your weakness. Know your tolerance.
Caught off-guard? Okay. Think it's easier to change the world, or easier to change how you fit into this environment? Be amphibious. Be what is required at any and all times to survive and potentially thrive, but survive first. Evolve.
Once one is flexible enough to see paths of positivity through personal interpretation, set goals. Nothing is more central to victory, not even talent... than is self-discipline. Target prices. Panic points. Never let failure or defeat become habit.
Quite simply... carry on with the mission. You are never as smart, nor as foolish as you think you are. Act, but always act for a reason that could be explained to someone uninitiated. Ever vigilant.
Note to Readers: I had an entire segment on the war in Europe and a few related items ready to go, but I want this lesson to resonate, so I am going to hold off on hitting you with too much information at once. Feel free to print out these five steps to victory and post them somewhere to be used in response to any life situation. I will republish these steps from time to time as I think necessary, but I can't know when in your life, it becomes necessary to understand, identify, adapt, overcome, and maintain. We are TEAM.
Economics (All Times Eastern)
10:30 - Oil Inventories (Weekly): Last -3.449M.
10:30 - Gasoline Stocks (Weekly): Last +785K.
The Fed & Treasury (All Times Eastern)
09:30 - Speaker: Philadelphia Fed Pres. Patrick Harker.
10:00 - Speaker: Treasury Secretary Janet Yellen.
14:00 - FOMC Minutes.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (LEVI) (.42)