"The second best decision in time is infinitely better than the perfect decision too late."
-- General Omar N. Bradley
Ugly, Not Awful
Wednesday trading felt awful. At times. There was a good reason. In fact, there were good reasons for the weight forced upon price discovery by algorithms that react faster than we simple humans can. There was a time when we would see a headline cross, then watch for the tape to move. Now, we see the tape move and then look for the headline.
October consumer prices caught much of the blame for a second consecutive "down" day for equities on Wednesday. That was indeed what lit the fire, and provided the kindling. The Evergrande news, or should I say Evergrande "headlines" were the accelerant. Long before markets learned that China Evergrande Group had again averted a default, as customers of clearing firm Clearstream did receive overdue interest payments on three separate dollar bonds. The troubled real estate giant had to make coupon payments totaling $148.1M as multiple 30-day grace periods expired on Wednesday. It had been widely reported earlier, at least on social media, and by some news sources during the regular Wednesday trading session that Evergrande had "officially" defaulted.
High speed, keyword reading algorithms then did what they do best. Create momentum.
More About That Kindling
October consumer prices hit the tape an hour ahead of those twin opening bells down at 11 Wall Street and up at Times Square. Headline CPI printed with a six handle, up 6.2% year over year, or +0.9% month over month -- the hottest point of sale inflation experienced by U.S. consumers since 1990. Core inflation was much cooler, but still too hot, at 4.6% over last October, and up 0.6% over September.
Energy pricing is, of course, out of control, with gasoline up 6.2% over just one month, and 49.6% over one year. Fuel oil has moved similarly both sequentially and annually. Energy Services? +12.3% m/m, and 59.1% y/y.
Used car prices re-accelerated after moderating for three months. While food prices and prices for non-energy services, shelter and medical care all saw increases, none were on the level of energy prices.
What do you expect when global economies can not reopen evenly? What do you expect when a nation that finally achieves energy independence, quite voluntarily, through what can only now be seen as policy error, relinquishes that independence?
The Misery Index (remember that one?) -- Unemployment Rate + Headline CPI (4.6%+6.2%) -- now reaches a level rarely seen in modern America, 10.8%, despite a precipitous drop in unemployment just since the spring.
Incredible.
Less Than Great Expectations
The October inflation print put the bond market into action. Traders started selling the long end of the curve, and this expression of distribution was indeed exacerbated by an auction of U.S. 30-year paper tailing the secondary market at the time by five basis points, printing at a high yield of 1.94%. Remember that bond markets are closed today for the federal, (really global) holiday.
This chart illustrates the yield spread between the U.S. 90-Day T-Bill and the U.S. 10-Year Note. While Wednesday's move felt alarming, this most important of all spreads, at least as far as the Fed is concerned, has still flattened on balance since earlier in November and certainly since mid-October. However, this spread does not really capture where much of Wednesday's damage was done.
The U.S. 2-Year Note gave up nine basis points, and is now frozen in time at a yield of 0.515%, while the U.S. 5-Year Note finished at a yield of 1.222%, having surrendered an incredible 14 basis points. The yield spread between the U.S. 2-Year Note and the U.S. 10-Year Note (also very closely watched) did not quite look like the above chart as the whole spectrum moved in unison.
Check this out:
The underlying fear now becomes: "What Now?" Based on where the hottest spots are, inflation still looks transitory in nature. That does not make the pill any less bitter to swallow right now. As I find it highly unlikely that this torrid pace of accelerating prices will abate prior to mid-2022 at the earliest, what if we see a headline print for November, December, or January CPI that hits the tape with a 7 or, bite my tongue, an 8 handle? What if core inflation sneaks into the 5's or (I don't want to think it), the 6's?
I have long stuck by my stand that the current heat was temporary, and that afterward, perhaps by third quarter 2022, consumer-level inflation levels off closer to 3% than anything else. That's still very possible, maybe even probable. The great question becomes: How much pressure does the FOMC, a committee truly in a state of political flux, feel to address this current misery? Labor market conditions have been Chair Powell's focus, and in my opinion, it had to be. Of course too much liquidity has been created.
Will the Fed feel compelled to step on the gas on tapering? Remember, any QE at all, still is accommodative. Does the next version of the FOMC, with a very different looking board of governors and perhaps a new Chair, rush in order to be in a more flexible position sooner than previously expected?
First things first, Mr. President. Either renominate Chair Powell or nominate his successor, and nominate at least one new governor simultaneously. The time to act with urgency has already passed.
A financial market "taper tantrum" is still a possibility.
The Reset
Wednesday's equity market action may have not felt too nice, but it did do a lot to repair current market conditions. What the markets really need to do, and it would be a heck of a lot better than increased volatility going into the holidays, would be to build a basing period of consolidation for the major indexes.
Losers on Wednesday decisively beat winners at both of New York's primary exchanges on heavy trading volume. There were some clear signs of professional distribution, which at this point, is akin to profit taking. The Nasdaq large-cap indices and the smaller-caps took the brunt of the bond market-induced equity market repricing for the day. Advancing volume comprised 34.8% of the aggregate for NYSE-listed names, while advancing volume comprised 28.6% of the composite for Nasdaq-listed stocks.
Readers will note that the Nasdaq Composite is probably the closest among our major indexes to testing its 21-day exponential moving average (EMA). The index closed on Wednesday at just a 1.1% premium to that moving average, down from more than 4% on Monday morning, while the index closed at a 3.5% premium to its 50-day simple moving average (SMA), down from 6.1% on Monday morning. For the S&P 500, these premiums now stand at 1.3%, and 3.6%, respectively.
While equity markets may get a break today on lower volumes, with many participants out for the day, and who knows who will make it a four-day weekend, it would be difficult to believe that this reset is complete. Economic growth does not seem to be a problem. Then again, the central bank is still adding liquidity, and has downplayed rate hikes. Yes, I'm still a bull. No, I'm not all in.
What?
Supposedly, the U.S. and China have made a joint declaration from COP26 to cooperate on climate change -- if you believe Chinese climate envoy Xie Zhenhua and if you believe U.S. special presidential envoy for climate change John Kerry.
Before I write anything too sharply critical of either side here, let's just pretend I'm from Missouri.
On That Note...
Forex Suggest estimates that Bitcoin mining is by far the "dirtiest" of all cryptocurrencies, and alone will be responsible for the emission of 56.8M tons of CO2 into the environment just for 2021. While many corporations are making pledges as far as getting to net zero carbon emissions and actually attempting to remove past emissions, just offsetting the damage to the environment caused by Bitcoin miners this year alone would require the estimated work of 284.1M trees all working together at the same time. Ethereum, the second dirtiest crypto, according to the study, would require just 21.9M trees working together to offset the harm done in 2021.
No Day Off
Apparently, the mainstream media thinks it's a big deal that Wall Streeters will not get a day off for New Year's this year being that Jan. 1 falls on a Saturday. Uhm, guess what? Most of Wall Street either works for commission or gets paid based on their profit/loss ratio.
People responsible for creating their own paychecks never, ever complain about going to work. It's the holidays that reduce the number of working days in a monthly billing period that this crowd complains about. They'll all work on weekends if you let them.
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Economics (All Times Eastern)
Federal Holiday. No significant domestic macroeconomic data-points scheduled for release.
The Fed (All Times Eastern)
Federal Holiday. No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: ( RIDE) (-0.59)
