"There is nothing permanent except change."
Positive Turn of the Worm
It was just about 2 a.m. in New York. Maybe just a tad earlier. Everything either bottomed, or topped, depending on one's point of view, depending on one's stance. European equity markets moved higher, bringing U.S. equity index futures along for the ride. Crude oil sold off with gold. U.S. Treasury securities sold off as well, the 10-Year Note paying more than 2.04% before finally hitting some support.
It had been just a few hours earlier that Western intelligence agencies were throwing around names of pro-Moscow Ukrainian politicians and former politicians (that I will not name here) that might be tapped by Russian President Vladimir Putin to head up a puppet government in Kyiv in the event of a Russian invasion. The idea was not crazy. Roughly 130K Russian troops had moved into position around Ukraine's non-NATO borders, including those involved in a joint exercise inside Belarus, and those serving aboard amphibious assault craft in the Black Sea.
President Biden, and President Macron of France had stepped up to the plate, German Chancellor Scholz will still make his pitch in person this afternoon in a face-to-face meeting with Putin. On Monday, the mood seemed to shift ever so slightly in a better direction as Russian Foreign Minister Sergey Lavrov proposed the continuance of diplomatic effort over kinetic military activity. Lavrov apparently had the approval of his president in taking the conversation there.
Finally, as most of us slept, clouds parted ever so slightly, and the worm turned. Trust it? I don't think we are even close to being that foolish. Better than the alternative? When one side lowers its weapons to allow for dialogue, it's always better than the alternative.
Russian Defense Minister Igor Konashenkov said, "The units of the southern and western military districts, which have completed their tasks, have already started loading on to rail and road transport and will start moving to their military garrisons today. Individual units will march on their own as part of military columns. A number of combat training events, including exercises, have been carried out as planned. As the combat training events are over, the troops will, as always, perform combined marches to their permanent deployment points."
The move away from safe-haven assets and back toward riskier holdings across financial markets was almost immediate. Just an aside: Those joint exercises being held by Russian and Belorussian troops inside Belarus are not scheduled to be completed until Feb. 20.
Not So Manic Monday
Equity markets for the most part shaded red on rather ugly looking breadth on Monday. In one way, it was more of the same, in terms of trajectory. In another way, it was nothing like the price discovery experienced last Thursday and Friday. Though the VIX had spiked above 31, Put/Call ratios eased, and there was in no way the stench of nearly panicked urgency in the air that was so pervasive across financial markets as last week wound down.
The S&P 500 gave up just 0.38%, extending what is now a three-day losing streak
, importantly closing at a 1.2% discount to its own 200-day simple moving average. The Nasdaq Composite closed essentially unchanged (down microscopically), and now needs to tack on 3% just to take back its 21-day exponential moving average, and then refocus on the 200-day SMA, which is running considerably further north of the shorter-term moving line. There was actually some green on the screen on Monday. The Dow Transports gained 0.8% on Monday as Avis ( CAR
) ran 7.4% into earnings, and the Nasdaq 100 closed just north of unchanged.
As to SPDR sector ETF performance , only Consumer Discretionaries ( ( XLY
) ) closed notably higher (+0.57%), led by the autos. Eight of 11 sectors closed notably lower for the day, led lower by Energy ( ( XLE
) ) despite the fact that both crude and natural gas spiked on Monday (nobody knows anything). Both "growthy" type sector ETFs -- Communication Services ( ( XLC
) ), and Technology ( ( XLK
) ) -- closed very close to "unch" for the session as both the Dow Jones U.S. Internet Index and Philadelphia Semiconductor Index found some tepid support.
As mentioned above, breadth remained rather lousy. Losers beat winners by a rough 5 to 2 at both of New York's primary equity exchanges. Advancing volume took 32.2% of NYSE composite volume, and 38.2% of the composite at the Nasdaq. Aggregate trading volume decreased on Monday from Friday for names domiciled at both the NYSE and Nasdaq, and for names constituent to both the S&P 500 and Nasdaq Composite.
In plain English, conviction in this selloff waned significantly over the weekend.
Not that the political and geopolitical world can refocus just yet. Troops moving away from borders can easily be re-redirected. For markets though, at least for this morning, the focus returns to macro-economics, the impacts of macro-economic data upon monetary policy and of monetary policy on macro-economic data. Oh, and of course corporate earnings.
The key this morning will be the Bureau of Labor Statistics' numbers for January PPI more so than it ever is. Yes, we will see data for both January Retail Sales and January Industrial Production tomorrow morning and those both remain key to real-time GDP models, but PPI led CPI on the way up. Then numbers vary, and even though both present as data for the month past, producer-level prices are often interpreted as a leading indicator for consumer prices. Producer prices led on the way up, and for January (this morning) producer prices are expected to exhibit a deceleration in the pace of producer/wholesale price inflation.
Don't get me wrong. You won't get an "all clear" today, but if January PPI prints down year over year (as expected) at both the headline and core, this makes February CPI (scheduled for March 10, ahead of the next FOMC policy statement on March 16) all that much more interesting. This would be a second consecutive decrease in the pace of year-over-year increases for headline level PPI at that.
There is a good reason, if estimates are close, to believe that consumer-level inflation has peaked or is peaking. I know that I have said it before, but this is where the data appears to be leading, sans an upside surprise today, which I don't think anyone is rooting for.
Jugglers and Plate Spinners
Everyone loves the circus!
Currently futures trading in Chicago are pricing in a 56% probability of a 50 basis point rate hike on March 16, with likely 25 basis point hikes added on apiece over the next four policy meetings -- in May, June, July, and September. According to current futures prices, the FOMC supposedly pauses to catch its breath in November and then throws one last punch for 2022 in December. All said and done, futures markets think that the FOMC can take the fed funds rate from the current target of 0% to 0.25% to a target of 1.75% to 2% by year's end (while drawing down the balance sheet).
Color me skeptical. Unless there is some kind of wild and unforeseen explosion of pure economic activity just around the corner, and I mean organic growth like we've never seen, not just making up ground lost during the pandemic. Like I said, color me skeptical.
The good news is that St. Louis Fed President James Bullard appeared on CNBC on Monday morning and did not back off of his currently aggressive hawkish stance on frontloading rate hikes and getting rolling on the balance sheet. (Just for the record, I do agree with Bullard on addressing the balance sheet sooner rather than later even if it will directly impact asset prices.) This time, unlike last Thursday, markets yawned.
In an interview conducted Friday, and published at The Wall Street Journal on Monday, Kansas City Fed President Esther George, who is considered by many to be the most hawkish official at the Fed, spoke her mind. George sounded quite pragmatic, said she was not surprised by January's CPI print, and stated that she is willing to consider a 50 basis point hike in March but is not married to the idea. George also appears to understand the complexities involved in unwinding a $9T balance sheet that is probably (certainly) much larger than it could or should be at this point.
I think it is quite obvious that the Fed should not be adding to the balance sheet this month, and I also think it is quite obvious that the Fed should have stopped buying mortgage-backed securities as far back as January 2021. That's where the unwind should first focus, which I guess puts me in agreement with Cleveland's Loretta Mester on that issue. Nobody is saying it, but the Treasury side of the Fed's balance sheet could be used to enforce a "healthy'' kind of yield curve control (the slope, not specific price points) should that become an issue.
On That Note...
You all read the New York Fed's blog series "Liberty Street Economics", right? No? Okay. This is the deal. On Monday, the blog published a post with six co-authors, regional president John Williams among them, citing consumer surveys showing that median one-year-out inflation expectations are in decline for the first time since October 2020. Currently, that one year look ahead is for inflation of 5.78%, and the outlook over three years (3.48%) and five years (3%) shows further deceleration.
From the blog: "This result suggests that while consumers are highly attuned to current inflation news in updating their short-term inflation expectations, they are taking less signal than before the pandemic from the recent sharp movement in realized inflation when revising their three year ahead expectations."
Just an Idea
I initiated Cisco Systems ( CSCO
) on Monday afternoon on the dip created by the news that the company had reportedly made a $20B bid for Splunk ( SPLK
) , but that the two companies were not in current discussions. Just an FYI, neither company is knocking doors down. Both have been consistent at one thing -- underperformance.
Does this mean that Cisco CEO Chuck Robbins, who comes off as strikingly competent, is about to get deadly serious about buying what he needs to better grow certain offerings such as cybersecurity through the use of big data analytics? We all expected more than we have seen from a number of Cisco initiatives over recent years.
Cisco reports on Wednesday night. Wall Street expects revenue growth of just 5.9%. Splunk remains without a permanent CEO, has posted corporate losses for three consecutive quarters, and for six of the past seven. Wall Street is looking for paltry revenue growth of just 4.3% or so when the company reports in early March.
Robbins is right to show interest in what can put his offerings over the top. He is also right to have bid barely more than market cap for a business that appears to be withering on its own without him.
I like the idea that Cisco may be getting aggressive. I like that Robbins, in doing so, appears able to remain frugal. I like that Cisco pays shareholders $1.48 per year (yield: 2.78%) just to stick around. In short, I'm back in CSCO.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing index (Feb): Expecting 11.3, Last -0.7.
08:30 - PPI (Jan): Expecting 9.1% y/y, Last 9.7% y/y.
08:30 - Core PPI (FJan): Expecting 7.9% y/y, Last 8.3 % y/y.
08:55 - Redbook (Weekly): Last 13.3% y/y.
16:00 - TIC Net Long-Term Flows (Dec): Last $137.4B.
16:30 - API Oil Inventories (Weekly): Last -2.025M.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open
: ( BWA
) (0.76), ( ECL
) (1.27), ( LDOS
) (1.60), ( MAR
) (1.00), ( ZTS
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