What was that? Stocks rallied sharply. As did Treasury securities. Change in trend? You know I can't go that far at this point.
Relief Rally? Bear Market Rally? Everyone knows that some of the wildest rallies occur during downtrends. Unbroken downtrends.
Energy commodities and energy sector equities certainly did not participate. Even with the announced OPEC+ production cut. Even with Gazprom's shutdown of Nord Stream 1. Front-month WTI Crude futures took a 6% hit on Wednesday, dipping below $82 a barrel, which is where they still trade very early on Thursday morning. U.S. natural gas prices dropped below their own 50-day simple moving average (SMA) for the first time in almost two months.
This sector-specific selloff acted as an anchor around the neck of most energy stocks. The Energy SPDR ETF ( XLE) surrendered 1.16% on Thursday, the only one of the 11 sector SPDR ETFs to close in the red, while 95% of the stocks that comprise the S&P 500 closed in the green. The Nasdaq Composite, Russell 2000, and Philadelphia Semiconductor Index all finally snapped seven-day losing streaks. Note that all four of those indexes, among many others, remain well below all of their key moving averages.
While it was nice to see equities rally, nice to see Treasury yields come off of multi-year highs, and nice to see the U.S. Dollar Index move below the 110 level, I would say that we remain at least a few sessions away from confirming a new tradeable bottom even if this was one. More than two months ago, we experienced the bullish reversal on June 16. There were some head-fakes, but we did not get a pure volume-based confirmation that a tradeable bottom had been set until June 24.
That bottom had something going for it that this one does not, though. Both June 16 and June 24 were days of extraordinarily elevated trading volume. The day of the confirmation was also the day of the mid-year Russell reconstitution, which is usually one of, if not the most heavily traded days of any year. Yesterday, though seeing 10 of the 11 sector SPDR ETFs trade not only higher but at least 1% higher, and seeing advancing volume take more than an 80% share of composite trade for listings of both of New York's primary equity exchanges, the trading volume just was not there.
On a day-over-day basis, aggregate trading volume contracted 5.7% for NYSE listings and 7.8% for Nasdaq listings. In short, a lot of the pros apparently sat out Wednesday's rally. Sure, what we saw was part short-coverings and part high-speed algorithms cannibalizing each other, and that is exciting. That may be all it was though, without a pivot by the Fed.
Ahh, yes, let's go there...
Where The Wild Things Are
On Thursday morning, Fed Chair Jerome Powell will participate in a moderated discussion at the Cato Institute's Annual Monetary Conference. Powell is not expected to speak for very long, nor is he expected to veer from his terse communication to the media and to the marketplace at Jackson Hole. That said, Powell is expected to take questions from the audience, and that is always where a well laid plan can take an unplanned turn.
Aside from the Fed Chair, the Fed has been out in force this week as the group will go into forced hibernation (the pre-FOMC policy meeting media blackout period) this Saturday ahead of the September 21 policy meeting/statement. Currently, futures markets trading in Chicago are pricing in an 82% probability for a 75 basis point hike (to the fed funds rate target) at that meeting, with an 82% probability for an additional 50 basis point hike six weeks later on November 2. That would take the target for the FFR up to 3.5% to 3.75% less than two months from now, and from today's 2.25% to 2.5%.
On Wednesday morning, the Wall Street Journal ran a story written by Nick Timiraos that laid out the likelihood that most of the committee was probably leaning toward a 75 bps hike on the 21st. Hence the 82% probability, which is up from just 60% since very early Tuesday morning. That piece actually placed some pressure on equities early on Wednesday.
There were two key speakers that opined publicly on Wednesday. Neither was dovish, though one made a "less than hawkish" observation.
Speakers
First up was Cleveland Fed President Loretta Mester who reiterated her stance, which has been aggressive, but consistent. Mester believes that the fed funds rate needs to be above 4% by early next year, does not expect the FOMC to cut rates at any point next year, and probably would not mind seeing the Fed sell mortgage-backed securities outright in addition to the methodical quantitative tightening program. At least I can agree with that last part. The Fed had been adding MBS to the portfolio for more than a year longer than was necessary or even logical in the wake of the Covid-related economic crisis.
Mester said, "It's better to focus on what is the path of interest rates. We do have to raise rates from where they are now. I think we have to get into positive territory for the real rate and that means we're going to have to do more work than where we are now to get inflation on a downward path."
Should we tell her that the Treasury Department's own website has not posted a negative Par Real Rate for the U.S. 10-Year Note since March 31?
The speaker that provoked a high-speed algorithmic short covering pizza party on Wednesday was Fed Vice Chair Lael Brainard, one of the Fed's more outspoken doves in a past life. Brainard was hawkish. She said, "We are in this for as long as it takes to get inflation down." She did not go into how large a hike she expected for the September 21 decision, but she did say that the central bank would need to slow economic activity "for some time."
Then Brainard said something that keyword-reading algorithms picked up on in a microsecond. She said, "At some point in the tightening cycle, the risks will become more two-sided." She added that the speed of this tightening cycle could "create risks associated with overtightening."
Does that mean that a Fed pivot is near? Not necessarily. It does, however, mean that at least one of the Fed's key thinkers is at least doing just that... thinking, which is a welcome divergence from the massed group-think (group-stink) that we have witnessed at the central bank of late.
Do I Really Ask All That Much?
I mean, housing appears to be past-peak. Most of your well-known retailers are being forced to discount inventories going into the holiday season. Gold, lumber, copper, iron ore, and crude are all well past peak. The service sector has gone over a cliff if one trusts the S&P Global survey over the ISM survey. Labor markets are either very strong or very weak, depending on which BLS survey one chooses to focus on. Oh, did I mention the seemingly ever-strengthening U.S. dollar?
In short, deflationary forces are at work and have been for quite some time now. Consumer surveys show that higher forward-looking expectations for inflation are not embedded in public perception. To the contrary, the public now expects lower prices for housing, and gasoline. The public sees a return to what they consider to be a more normal pace of inflation.
The Fed needs to reduce the size of the balance sheet. That should be the focus. That will draw liquidity enough from the economy and weigh upon asset prices of all classes all on its own. I can even see the case for further (smaller) increases to be made to short-term interest rates. The time to slow the pace of these increases is now, however. Time to allow policymakers to see the impacts of what has already been done.
Let the economy catch up. Inflationary forces such as Covid-related supply chains that run through Asia and war-impacted food and energy stocks in Europe can not be corrected for through the intentional damaging of massed public demand and thus... national economic potential. Perhaps balancing that forward-looking economic potential with forward-looking expectations for consumer-level inflation needs to be more of a focus at this time. As always, I am here to help.
Apple Launch Event
How clever was that move by Apple ( AAPL) (or non-move) in not increasing prices for the new series of iPhone 14's going into the holiday season with consumers feeling a bit strapped? I think that was brilliant. Analysts were surprised. My guess is that Apple knows their market better than most.
I saw the new top of the line Apple Watch. Interesting. Surely a watch designed for outdoorsy and athletic types. I did see that the new watch is designed to work well in temperatures ranging from -4F to 131F, which is fine for extreme athletes, but what about military types? I am not sure what the highest temp that I ever had to work in was, but I know it was at least 124F. On the other hand, -4F is really cold, but every service member has had to work outside for an extended period of time in colder conditions than that.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 240K, Last 232K.
08:30 - Continuing Claims (Weekly): Last 1.438M.
10:30 - Natural Gas Inventories (Weekly): Last +61B cf.
11:00 - Oil Inventories (Weekly): Last -3.326M.
11:00 - Gasoline Stocks (Weekly): Last -1.172M.
15:00 - Consumer Credit (July): Expecting $32B. Last $40.15B.
The Fed (All Times Eastern)
09:10 - Speaker: Federal Reserve Chair Jerome Powell.
12:00 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( BILI) (-4.45)
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