"I've been waiting here to be your guide
Reveal the secrets that you keep inside
No one leaves until the night is done
The amplifier starts to hum
The carnival has just begun"
- Stanley, Cuomo (Kiss), 1998
Welcome To The Show!
You've waited in suspense all week. The S&P 500 peaked for the week (so far) on Tuesday, not surprisingly at its 200-day simple moving average. The Nasdaq Composite, well short of that line, apexed alongside its broader, large-cap cousin. Equity markets have traded lower to sideways ever since, on lighter and lighter trading volume. As Friday approached, both aggregate trade and volatility receded. Late Thursday, the VIX traded with a 19 handle but is now moving higher. On Tuesday, the CBOE Total Options Put/Call Ratio went out at 0.85, its lowest reading since early July. On Thursday, this ratio printed at 0.92, within striking distance of its key moving averages.
Sort of like crossing a murky, disgusting wetland swamp you just know is filled with cottonmouth vipers, you have worked your way toward this Friday -- this monthly expirations Friday. You've been through hundreds, even thousands (?) of monthly expirations. Not, however, too often with equity markets on a two-month tear that has brought your year-to-date P&L all the way back from its depths (restoring $7 trillion in total market cap), and with the nation's central bank remaining on mission despite the economy seemingly already tripping into at least a technical and perhaps (far) more serious recession.
August has been quiet for equities in terms of range. That could be about to change. According to Goldman Sachs strategist Ricky Fishman (whom I read about at Bloomberg News), about $2 trillion of options are about to expire, forcing holders to either roll over existing positions or open new ones. The supposed $2 trillion total includes about $975 billion of S&P 500- linked contracts and approximately $430 million of derivatives related to single stocks set to expire.
Thursday Snooze Fest
Talk about low tide. Was it the moon? The action receded on Thursday and never really returned. Among the majors, the S&P 500 tacked on 0.23%, the Nasdaq Composite 0.21%, and though I don't really consider it a major, the Dow Industrials just 0.06%. Smaller caps led the quiet session, as the Russell 2000 added 0.68%.
What little action there was really happened in the sub-large-cap semiconductor space. The Philadelphia Semiconductor Index ran 2.28%, and the Dow Jones US Semiconductor index 2.23% as Wolfspeed Inc. (WOLF) , a mid-cap, screamed 31.86% higher on earnings and guidance, and Pixelworks Inc. (PXLW) , a small-cap (and a Stocks Under $10 holding), charged ahead by 14.63% after coming to an agreement to sell a piece of its Chinese subsidiary.
Large-cap semiconductors were led by On Semiconductor (ON) , Broadcom (AVGO) and Marvell Technology (MRVL) , which were up 7.26%, 3.69% and 3.61%, respectively. Seven of the 11 S&P sector-select SPDR ETFs shaded green for the day, but only Energy (XLE) , which was up 2.69%, managed to gain or lose more than 0.68%.
Trading volume was, as already mentioned, quite paltry. Winners beat losers by pedestrian margins at both of New York's primary equity exchanges. However, New York Stock Exchange-listed aggregate trading volume contracted 14.7% from an already soft Wednesday total and 28.3% from a week ago Thursday. Nasdaq-listed aggregate trading volume fell 10.4% day over day and 20.2% from a week ago. Trading volume across the S&P 500 for Thursday traded at a 35% discount to the 50-day trading volume simple moving average (SMA) for the index and was the most lightly traded day for S&P 500 constituents in aggregate since December 2021.
More Ugly Macro
The Atlanta Fed had already taken its GDPNow model for third quarter economic growth down to +1.6% (quarter over quarter, seasonally adjusted annual rate) this week from +2.5%. That model will not be revised again until next Wednesday in response to July Durable Goods Orders. Thursday, however, presented enough lousy macro despite weekly first-time jobless claims that printed below expectations.
First there was the misunderstood August print from the Philly Fed (Philadelphia Manufacturing Index) that followed an abysmal reading earlier in the week for the Empire State Manufacturing Index. I saw too many folks who know better celebrating Philly's upside beat. Phlly printed at a headline reading of 6.2 versus expectations for something close to -5. Folks who don't look at how the sausage is made tend to speak first, think second.
Remember that the most important component in any manufacturing-focused survey is New Orders. For Philly, New Orders for August printed at -5.1, making August a third consecutive month of contracting New Orders. Unfilled Orders, the second most important component, also printed in contraction. Looking out six months, respondents see both of these components more deeply in contractionary territory. Real cheery. Celebrate!
Where did the "above zero" print come from? Glad you asked. Prices Paid, at +43.6, was by far the strongest contributing component to that headline +6.2 reading. Huzzah. Strength was also seen in Prices Received, Shipments and Number of Employees. So, the "positivity" was provided primarily by inflation, with assists from shipments and employment. Bear in mind that without a rebound in New and Unfilled Orders, both shipments and employment simply vanish...
Did I mention that July Existing Home Sales printed in contraction for a sixth consecutive month and at the lowest level for that series since July 2020? This came on top of July Housing Starts that on Tuesday printed at their weakest level since August 2020.
On That Note...
The (intentionally) unlearned keep talking about strength in labor markets while maintaining focus squarely on the Bureau of Labor Statistics Establishment Survey and pretending that the BLS Household Survey doesn't even exist.
Consultant firm PwC on Thursday released findings from a survey of more than 700 US executives and board members across a range of industries that implies that exactly half of US companies are either already reducing payroll or intend to. About 52% of respondents state that they have already implemented hiring freezes, while more than 40% state that they are rescinding job offers already made. More than 40% also state that they are either reducing or completely eliminating sign-on bonuses.
So healthy. So robust.
Send in the Clowns?
--that changes made to monetary policy typically take nine months to as much as a year to broadly impact the Main Street economy.
--that the fed funds rate has gone from the zero-bound to a range of 2.25%-2.5% in less than six.
--that quantitative tightening has barely gotten off to a start at all. (At least the week ended Aug. 17 actually saw a $29.4 billion decrease in the size of the Fed's balance sheet to a "cool" $8,849,762,000.)
--that the pace of that program finally accelerates in September.
--that Core CPI peaked in March.
--that Core PCE (Personal Consumption Expenditures) inflation peaked in February.
--that the US economy has printed in contraction for consecutive quarters and is not exactly coming out swinging this quarter.
St. Louis Fed President James Bullard said:
"We should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation. I don't really see why you want to drag out interest rate increases into next year."
Sarge says... "Maybe we drag out rate hikes in order to save jobs. Just sayin'."
"The idea that inflation has peaked is, is a hope, but it's not statistically really in the data at this point.
Sarge says... "Except that It's precisely in the data. Both core CPI and core PCE apexed on a year-over-year basis either five or six months ago."
"There's just a lot to like about the labor market"
Sarge says... "Except for the BLS Household Survey, the above mentioned PwC Survey and the now persistent 1.4 million individuals or so who remain counted on weekly continuing jobless claims."
"I don't think we're in a recession right now, but as we continue to raise rates, as we continue to raise costs, so to speak, of borrowing across the economy, it should be putting, tapping the brakes on the US economy, and that makes it more likely that we would end up in a recession."
Sarge says.... "Hey, I've got a job. How 'bout you?"
Kansas City Fed Pres. Esther George said... "I think the case for continuing to raise rates remains strong. The question of how fast that has to happen is something my colleagues and I will continue to debate, but I think the direction is pretty clear." San Francisco Fed Pres. Mary Daly added, "We have done a lot, and I think we have to be very mindful that our policy decisions often operate on a lag. We have to watch carefully how that's coming through."
Sarge says... "She almost gets it."
San Francisco Fed Pres. Mary Daly said.... "We need to get the rate up, up to neutral at least, which is around 3%, but likely to restrictive territory - a little above 3% this year and a bit more above 3% next year."
Sarge says... "She clearly does not get this whole economics thing."
More From Your Pal...
The neutral rate is the theoretical rate where policy is neither accommodative nor restrictive. We do not know where that is. Several macroeconomic indicators suggest that we are already there. We certainly have no idea where the neutral rate is as $95 billion of liquidity is pulled from the monetary slosh on a monthly basis. To assume full understanding of just how much that program will tighten monetary conditions is to personify arrogance.
We ask not for increased accommodation. Instead, we ask now that the economy is five to six months past peak core inflation, to downsize short-term rate hikes in order to allow the lag that Esther George mentions to more fully manifest so that we can better determine where we are as the monetary base slowly drains. Nobody needs to poke the recession bear for experiment's sake. Understand the need for finesse. This is not the time for a frontal assault. This is the time for precision fire and careful maneuver. Think scalpel, not sledgehammer.
Economics (All Times Eastern)
13:00 - Baker Hughes Total Rig Count (Weekly): Last 763.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 601.
The Fed (All Times Eastern)
09:00 - Speaker: Richmond Fed Pres. Tom Barkin.
Today's Earnings Highlights (Consensus EPS Expectations)