Is it live? Or is it Memorex?
Was it real? Or just a mirage?
Was Wednesday's action reflective of a bear market relief rally? Or something to build on?
The day started out with a touch of ugly. The Bureau of Labor Statistics published March producer prices that surprised to the upside at both the headline and the core, and when measured on both a monthly or annual basis. This came just one day after consumer prices, though awfully high at the headline, had shown at least some signs of having peaked at the core.
Market participants, including this one, do see signs of peak or slightly past peak inflation, not that some great unwind is imminent, or at least not some unwind that would be of minimal impact to life on Main Street. Most market participants had looked forward to first-quarter earnings season, if only to change the channel, thus attempting to avoid the unavoidable forces that have come to impact life as a trader/investor - those being shortages both current and projected of almost all energy, and agricultural commodities due to the war in Ukraine, and shortages of everything else due to China's "Zero-Covid" policy.
While Treasury markets stabilized on Wednesday in the wake of what was not awful, but rather subpar international demand expressed for longer-term U.S. sovereign debt sold at auction this week, equities rallied hard.
Equities rallied so hard on Wednesday afternoon that both the S&P 500 and Nasdaq Composite traded at levels not seen since... Tuesday morning.
Whoa.
Accomplished Much?
Twenty-four hours ago, we pointed out the true "Inside Day" experienced by the Nasdaq indexes as well as several other measures of equity market performance on Tuesday. We decided that the two-day pattern probably foretold of increased volatility, but probably would ultimately produce a continuance of trend.. which is lower.
Well, we have already seen the increase in volatility. Now, with a three-day weekend ahead, and noted hawk (as well as Sarge fave) Loretta Mester of the Cleveland Fed (who votes on policy this year) set to speak just ahead of the closing bell, we shall find out just how much risk Wall Street (in an aggregate sense) is willing to carry over a prolonged period.
Don't forget, the Census Bureau will publish data for March Retail Sales this morning and traders will be able to react to that... but, and this could be a big but... the Federal Reserve will publish data for March Industrial Production on Friday morning and traders will have to sit on their hands until futures markets open on Sunday night.
About Wednesday, The S&P 500 took back 1.12%, regaining both the 4400 level as well as its own 50-day simple moving average (SMA) after closing below that line on Tuesday.
The Nasdaq Composite recaptured 2.03%, which is nice, but as illustrated below, spent a third entire session without even making contact with its 50 day SMA:
Remember, the longer it takes for the Nasdaq Composite to regain that line, the broader the pressure is that will be placed upon portfolio managers by their risk managers to reduce exposure to equity assets.
The rally was quite broad as the S&P Midcap 400, the S&P SmallCap 600, the Russell 2000, the Nasdaq 100, and the Dow Transports all packed on between 1.6% and 1.99% for the regular session.
Nine of the 11 S&P sector-select ETFs closed in the green on Wednesday led by the Discretionaries ( ( XLY) ) that in turn were led by anything related to travel. Those travel stocks were broadly impacted by strength in the airlines. After the Discretionaries, came Technology as both semis and software were hot.
Although the Industrials ( ( XLI) ) as a sector, gained 0.94%, the Dow Jones U.S. Airline Index tacked on 6.92%, as Delta Air Lines ( DAL) beat for the first quarter on both the top and bottom lines while hinting at a summer travel boom. Interestingly, DAL ran 6.21%, but was outperformed for the day by competitors American Airlines ( AAL) and Southwest Airlines ( LUV) , which were up 10.6% and 7.5%, respectively. American Air had raised guidance on Tuesday.
Only the Utilities ( ( XLU) ) shaded red for the day, while the Financials ( ( XLF) ) posted an "unchanged" close despite post-earnings weakness in JPMorgan Chase ( JPM) .
As for breadth, it was truly fantastic, but there is a caveat. Winners beat losers by almost 3 to 1 at both the NYSE and Nasdaq Market Site. Advancing volume took an 83.2% share of composite NYSE-listed trading and an 81.4% share of the same metric for Nasdaq-listed names. However, aggregate trading volume declined on Wednesday from Tuesday just slightly for Nasdaq-listed issues, while declining much more significantly for NYSE-domiciled stocks. Aggregate trading volume was also lower for constituent member stocks of both the S&P 500 and Nasdaq Composite.
In other words, the market roared, but the pros did not tag along in size. They either have to catch up, or they are just not coming.
Interesting day ahead.
The Fed
Federal Reserve Governor Christopher Waller spoke on CNBC on Wednesday. On inflation, Waller said, "I'm forecasting that this is pretty much the peak. It is going to start to come back down." I can agree with this statement, but the contraction in year-over-year pricing in April and beyond will be at least as much about the year-ago comparables as it will be about ebbing price discovery.
On policy, Waller said, "I prefer a front-loading approach. So a 50 basis point hike in May would be consistent with that and possibly more in June and July. We want to get above neutral certainly by the later half of this year and we need to get closer to neutral as soon as possible." Readers know full well that I favor a more cautious approach to interest rates as this will directly impact the Main Street economy.
My preference is for a more aggressive approach to reducing the balance sheet as the draining of the monetary base is more likely to be felt directly on Wall Street to a greater degree than in the general economy, at least in the early going. Since there is nothing that the Fed can do to address policy in China, or the war in Europe, intentionally slowing demand on Main Street may backfire. While fiscal largess has been the primary domestic force behind elevated consumer pricing in the U.S., that is where the central bank should place the most early emphasis.
Just an idea, but an idea from a kid with a better track record than the Fed.
The War
President Joe Biden announced on Wednesday that the U.S. would send an additional $800M in military aid to Ukraine, as well as expand on the level of intelligence it shares with Ukrainian forces. If there is one thing that U.S. and allied intelligence has been since before this war started, it has been accurate. The U.S. and U.K. intelligence agencies have simply been outstanding.
The U.S. is sending 11 Mi-17 helicopters (old Soviet birds), 18 howitzers, 40K artillery rounds, 300 Switchblade drones, 200 M113 armored personnel carriers (Vietnam-era armored shoeboxes with a 50 cal on top), 100 Humvees (better be up-armored), 12 counter-artillery radar systems, landmines and other equipment. The artillery and the radar will require some training, so small unit Ukrainian leaders will likely be pulled out of the field and taught to be instructors.
What do I think of this "aid"?
The artillery, the radar, and the Switchblades will help. As an infantryman, I would rather travel by foot than in an Mi-17 or M113. I don't need to travel inside anything large, with a distinct silhouette profile and an obsolescence on the modern battlefield. Thank you.
Elsewhere, the flagship of the Soviet Black Sea Fleet, the missile cruiser Moskva has been seriously damaged and the crew (about 500) has abandoned ship after its ammunition exploded. Apparently, Ukrainian forces took out the ship with Neptune missiles (which is Ukrainian in origin).
This is the second Russian naval vessel destroyed by Ukrainian forces since the start of the war, and the first destroyed at sea that had been engaged in launching missile strikes against Ukrainian cities. The amphibious assault ship Saratov had been destroyed and sunk at the Azov Sea port of Berdyansk.
In Addition...
As Russia's misguided invasion of Ukraine has to this point been a humiliating experience for the Russian Army (and now Navy), it has also unfortunately all but destroyed many Ukrainian cities, while probably inflicting tens of thousands of casualties on Ukrainian civilians. This has forced many NATO allies to suddenly refocus fiscal budgeting on national security and has driven non-NATO European nations to consider seeking refuge from potential Russian aggression within the alliance. Funny how that works.
No worries for Russians, though, apparently, losing a significant number of general officers, suffering casualties estimates at over 20%, losing naval vessels, getting your tails kicked in nearly every single confrontation involving the Ukrainian military and driving openly neutral nations into the arms of your supposed adversaries was all according to plan.
Both Sweden and Finland are known to be considering petitioning NATO for membership after decades of neutrality. Of course, the Russian response is one of threatening posture. Russian Security Council deputy chairman (and sometimes President) Dimitry Medvedev said early this (Thursday) morning... "if Sweden and Finland join NATO, the length of the alliance's land borders with Russia will more than double. Naturally, these borders will have to be strengthened." Medvedev spoke of moving Russian naval craft into the Gulf of Finland and threatened moving nuclear and hypersonic missiles into the Baltic region. How nice.
China Covid/Taiwan Semi
Shanghai, a city of some 26M or so people, reported 27,719 new infections of the SARS-CoV-2 virus on Wednesday. The city remains in lockdown, which has forced a number of manufacturers to suspend operations. Dozens of electronic components manufacturers in the nearby city of Kunshan have also now halted production as Beijing doubles down on its "Zero-Covid" policy.
The damage to the Chinese and global economies is difficult to estimate either in the short-term or on a sustained basis as China is not willing to try to live alongside the virus as most of the rest of the world is trying to do. Will global supply lines that have not already been shortened now make the effort to do so, as the pandemic has entered into a third year, and there really can be no guarantee that it will ever be completely vanquished? In fact, such hope is probably unrealistic.
What China needs to do is break down and purchase the more effective vaccines manufactured by Moderna ( MRNA) and Pfizer ( PFE) /BioNTech ( BNTX) that are more readily available to the rest of the planet.
Elsewhere, Taiwan Semiconductor ( TSM) reported 45% earnings growth for the first quarter driven by corporate demand and favorable exchange rates. Gross margin expanded to 55.6% and the company projects gross margin for the current quarter could go as high as 58% on revenue expected to grow 25%.
Breaking
It appears that Tesla ( TSLA) CEO Elon Musk has made an offer of $52.40 per share ($43.4B) to acquire Twitter ( TWTR) . Musk announced the offer this morning in a filing with the Securities and Exchange Commission.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 174K, Last 166K.
08:30 - Continuing Claims (Weekly): Last 1.523M.
08:30 - Retail Sales (Mar): Expecting 0.7% m/m, Last 0.3% m/m.
08:30 - Core Retail Sales Mar): Expecting 0.9% m/m , Last 0.2% m/m.
08:30 - Import Prices (Mar): Expecting 2.3% m/m, Last 1.4% m/m.
08:30 - Export Prices (Mar): Expecting 2.2% m/m , Last 3.0% m/m.
10:00 - U of M Consumer Sentiment (Apr-adv): Expecting 58.8, Last 59.4.
10:00 - Business Inventories (Feb): Expecting 1.3% m/m , Last 1.1% m/m.
10:30 - Natural Gas Inventories (Weekly): Last -33B cf.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 689.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 546.
The Fed (All Times Eastern)
15:50 - Speaker: Cleveland Fed Pres. Loretta Mester.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( C) (1.40), ( ERIC) (1.39), ( GS) (8.83), ( MS) (1.75), ( PNC) (2.85), ( PGR) (1.23), ( STT) (1.47), ( TSM) (1.27), ( USB) (0.96), ( UNH) (5.36), ( WFC) (0.82)
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