What a difference a day makes?
On Thursday, Treasury yields worked their way higher. Not even close to the pre-rally, pre-opening highs of Tuesday night into Wednesday morning, but higher than where they settled on Wednesday. This time the culprit was some macroeconomic data that in isolation is not altogether that meaningful, but as part of the grand mosaic of numbers that we study supports the idea that the Fed must remain overtly hawkish going forward. This put the whammy on US equity markets, and let me tell you... that was some whammy.
First off, weekly initial jobless claims printed on the light side of expectations yet again. This has been the recent trend. Layoffs, or at least the numbers of those seeking state benefits (though we feel as though we have seen so many corporate announcements), do appear to have softened significantly since the height of the summer. Then there was the revised second-quarter quarterly data concerning inflation that printed alongside the Bureau of Economic Analysis' final revision to its GDP estimate for the same quarter.
While second-quarter GDP growth still printed in the hole (-0.6% quarter over quarter, seasonally adjusted annual rate) for the second straight quarter, the Q2 GDP Price Index was revised to +9.1% from the expected +8.9%. In addition, Q2 Core PCE (Personal Consumption Expenditures) Prices were revised to +4.7% from the expected +4.4%. This put the talking heads over at the Fed in motion, and jawbone the markets into submission is exactly what they did.
More Fed Talk
Earlier on Thursday, St. Louis Fed President James Bullard, who has been a leader among the hawks, spoke publicly, saying, "If you look at the dots (dot plot), it does look like the committee is expecting a fair amount of additional moves this year. I think that that was digested by markets and does seem to be the right impression." After his speech, Bullard told members of the financial media, "We're determined to get to the right level of the policy rate in order to put meaningful downward pressure on inflation here."
Later, Cleveland Fed President Loretta Mester, who has been hawkish for most of her time in a leadership role concerning policy, said, "Real interest rates -- judged by the expectation over the next year of inflation -- have to be in positive territory and held there for a time. We're still not even in restricted (restrictive?) territory on the funds rate." Mester was asked later if an (acknowledged) economic recession in the US would slow her down on raising interest rates, and what she said was the hammer to the market's nail on Thursday. Mester responded this way: "We're going to do what we have to do to get the price stability. So, no."
Wow. Just wow.
At last glance, I see that futures markets trading in Chicago are now pricing in a 57% probability for a fourth consecutive 75-basis-point increase to the target range for the fed funds rate on Nov. 2 and a 55% probability for another hike of 50 basis points on Dec. 14. This would place the fed funds target rate at 4.5% to 4.75% by year's end, up from today's 3% to 3.25%, which itself is up from literally 0% earlier this year. Currently, those futures markets are pricing in a terminal rate of 4.5% to 4.75% that is reached in March 2023 and held there at least through late July 2023.
As for the quantitative tightening program that is working alongside the Federal Open Market Committee's assault on the Treasury yield curve in order to drain the monetary base/money supply, the Fed reported net balance sheet holdings of $8,795,567 million (nearly $8.8 trillion) for the week ended Wednesday (28 September). This was down $21.3 billion from the week prior, which in turn was down $16 billion from the week prior to that. This is after the balance sheet actually increased in size over the first two weeks of September. For the entire month of September, the Fed's balance sheet has only shrunk by $30.5 billion, once again badly missing the Fed's monthly target of $95 billion.
I understand that allowing maturing securities to roll off the back end of the balance sheet can be a volatile and bumpy road, but maybe we can start getting a little closer to reaching our target here? Maybe sell some mortgage-backed securities if you have to in order to get there? Mester has already suggested this. I am less opposed to shrinking the balance sheet through a sharp focus on MBS than I am with proceeding with aggressive short-term interest rate hikes before anyone can possibly assess the impacts of recent aggressive hikes past. Recklessness is rarely the answer -- for the economy, or in life.
Have any of you wondered what the Fed's real aim is? I mean, isn't it just a little odd that the entire FOMC has turned rabidly hawkish, and this includes many of those with an overtly dovish history? They appear panicked. Can this really just be about inflation, especially when inflation, while elevated, does not appear to have gone over the next hill?
Is this about breaking something? Perhaps something external even if there is an internal cost that might be almost prohibitive? They all seem mission-driven, marching in lock step as if under orders. Now, these are not Parris Island Marines marching with precision, these are academic-minded intellectuals. Usually one can tell the difference.
What if they see something, or know something not publicly available to the rest of us? What if whatever it is that they see, because if it really is fighting inflation and nothing else behind this, then the behavior is not only underdeveloped and childlike, it's inexcusable. Perhaps the real goal is currency war.
Not the kind of currency war that we all expected years ago that would result in a race to the bottom, but a race for elevated valuation where large countries can both export said inflation and force inflows of cross-border investment as global investors seek capital preservation, thus over the longer term reducing federal borrowing costs at the expense of foreign accounts and perhaps handicapping perceived competitors? Just an idea. Makes a lot more sense than what we're being told.
Fire in the Hole
The Thursday session was a tough one for the "long and wrong" crowd. Specialized indexes such as the Dow Utility Average (-4.11%) and the Philadelphia Semiconductor Index (-3.29%) were simply pounded. The Nasdaq siblings (Composite and 100) were beaten to the tune of -2.84% and -2.86%, respectively. The Russell 2000 dropped 2.35%, and our beloved S&P 500 surrendered 2.11%. How nice.
Among S&P SPDR sector select ETFs, Energy (XLE) was again the leader (on OPEC+ production cut rumors), unchanged for the day, as 10 of the 11 funds headed south. Utilities (XLU) and Discretionaries (XLY) led the losers, as cyclicals in general appeared to outperform defensives as they have all week.
Losers beat winners by a rough 5 to 1 at the New York Stock Exchange and by more than 3 to 1 at the Nasdaq Market Site. Advancing volume took just a 15.8% share of composite NYSE-listed trade and a 15.6% share of composite Nasdaq-listed trade.
There was a bright spot. There was? Yes, it appears that a number of portfolio managers turned off their machines in the afternoon and took their dogs to the beach. What? Oh, that was just me. Oh, well. Regardless, trading volume dropped slightly day over day in aggregate for NYSE listings, Nasdaq listings, S&P 500 constituent firms and Nasdaq Composite constituent firms. Simply put, there was less participation on the awful down day on Thursday than there was during Wednesday's rally or probably will be today as the month and quarter both come to a close.
Now to be sure, the S&P 500 made a new post December 2020 intraday low on Thursday of 3,610, undercutting lows made earlier this week and extending the current downtrend. The Nasdaq Composite finally made a low for this week that was lower than last week's low. This extends the downtrend here as well, but note that the Nasdaq Composite has still not made a new post June 2022 low.
What does it all mean? Well, the Fed is telling you quite overtly that it is, as quickly as it can, removing any environment conducive to economic growth or constructive as far as the wealth effect (housing, labor, 401Ks) is concerned. The fact that labor markets have been resilient is a problem for the Fed. This and the lack of anything resembling a change in trend followed by technical confirmation have kept me mostly in cash at least at nights and into weekends. I will not mind missing the bottom as long as I catch the trend.
The monetary environment being created offers little hope that this turn comes quickly. The charts, though, they seem less sure. I have shown you this broadening descending wedge pattern before.
The broadening descending wedge is a bullish pattern of reversal. Relative Strength for the S&P 500 is still sitting on the "oversold" fence, as the daily moving average convergence divergence (MACD) descends into the netherworld. You know what else is a bullish pattern of reversal? A double bottom, that's what. Let me do some erasing and replacing to see what I come up with...
What do you think of that? Almost too perfect? With sentiment so poor and the technicals setting up for some kind of reversal, we may get something very soon that amounts to another tradeable bottom. I can't promise you a rose garden, nor a sustained change in trend, but tradeable bottoms? We still get those, even with an FOMC that has turned into a bunch of hawkish robots. We got one in June. We sort of got one in early September. Technically, we are potentially (potentially, so I can weasel out of having written this if I have to) set up, I think, for something similar.
Futures Are Higher...
... on Friday morning. What could possibly go wrong? The BEA releases August PCE data at 08:30 ET. This is the series that the Fed follows most closely concerning consumer inflation. On a year-over-year basis, which is probably most important here, expectations are for +6.1% at the headline (down from 6.3%) and for +4.7% at the core (up from +4.6%).
After the numbers hit, expect to hear from Federal Reserve Vice Chairman Lael Brainard ahead of the opening bell and New York Fed President John Williams (whom I have never been especially impressed with as an economist) after the close.
And the Cradle Will Rock...
"And when some local kid gets down
They try an' drum him outta town
They say 'Ya could've least faked it, boy, faked it boy'
And so an early age he hits the street
'N winds up tired with who he meets
An' he's unemployed
His folks are overjoyed"
- Van Halen, Van Halen, Anthony, Roth (Van Halen), 1980
We all knew that Facebook had stopped growing rapidly a little while ago. It looks like the company, currently known as Meta Platforms (META) , now proves ready to acknowledge the fact. Meta CEO Mark Zuckerberg outlined a plan on Thursday that would reorganize teams within the firm and reduce headcount. These will be the first major budget cuts since the company was founded in 2004.
Zuckerberg said, "I had hoped the economy would have more clearly stabilized by now. But, from what we're seeing it doesn't yet seem like it has, so we want to plan somewhat conservatively." Zuckerberg added that Meta would be "somewhat smaller by year's end 2023." Acknowledging Meta's current challenge, he said, "For the first 18 years of the company, we basically grew quickly basically every year, and then more recently our revenue has been flat to slightly down for the first time."
Elsewhere, we knew that Apple (AAPL) had replaced PepsiCo (PEP) as the title sponsor of the NFL's Super Bowl Halftime Show. Now, we know that PepsiCo is looking to do a little more on the budget-cutting side. Fox Business reported on Thursday that PepsiCo could be considering offering buyouts to employees aged 55 years and older and still make additional layoffs if business conditions were to deteriorate further.
Economics (All Times Eastern)
08:30 - Personal Income (Aug): Expecting 0.3% m/m, Last 0.2% m/m.
08:30 - Consumer Spending (Aug): Expecting 0.2% m/m, Last 0.1% m/m.
08:30 - PCE Price Index (Aug): Expecting 6.1% y/y, Last 6.3% y/y.
08:30 - Core PCE Price Index (Aug): Expecting 4.7% y/y, Last 4.6% y/y.
09:45 - Chicago PMI (Sep): Expecting 51.9, Last 52.2.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 764.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 602.
The Fed (All Times Eastern)
09:00 - Speaker: Reserve Board Gov. Lael Brainard.
16:15 - Speaker: New York Fed Pres. John Williams.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled for today.