Last week, stocks in particular, climbed the "Wall of Worry" like clockwork, with major U.S. indexes gaining about 5% for the five trading days.
Part of that rally, on Friday, was driven by comments from the Federal Reserve (San Francisco Fed's Mary Daly) and from Wall Street Journal reporter Nick Timiraos who many view as the person the Fed uses to "leak" information into the market.
Both seemed to indicate that while a 75 basis point rate hike in November is a certainty, we could get a reprieve in December and February.
This is NOT a PIVOT. The term pivot indicates that the Fed is changing direction. This is simply practical.
The Fed, at least if they followed any standard economic theory, would eventually have to slow down the hikes and see how the data plays out. This is natural in any case, but particularly when the data are weakening!
- The conference board leading economic indicators has been declining since it peaked in February.
- WTI is now up "only" 11.5% in the past year, still high, but trending down and some "easier" comps coming up. Gasoline futures, up 18%, have also been declining and again, have some easier comparisons.
- Housing prices and rents and every sentiment indicator around housing has been dropping rapidly.
- The Manheim used auto price index is now down year on year and is trending lower still.
- Measures of shipping and freight are all well off their post Covid highs.
- Inventories continue to build and there is evidence of discounting still being required to clear inventory (such as Amazon's (AMZN) pre-Prime sale).
I am looking for bond markets to continue to show the strength that we finally saw on Friday -- after what may have been a "capitulation" trade to much higher yields on Friday morning .
Foreign exchange markets need to stabilize, but I think we can get that this week as the Fed is in a quiet period and that should let data prevail, which should continue to push back on the hiking at all cost narrative.
On equities, I'm remaining bullish for now, as better-behaved bond and FX markets will help keep up last week's momentum. Longer term, I'm very concerned about the direction the economy is headed in, but that isn't what will drive equities, at least not yet. Eventually I think we will see a "good old fashioned" risk-off trade, with lower bond yields and lower equity prices, but for now, any stability in bonds is an excuse to drive stocks higher (at least until bearish positioning gets beaten up a bit more).
I would reduce exposure to the commodity space first. That is the one area that I'm looking to reduce risk to at the start of this week.China remains un-investible and we will see that this weekend's re-election of President Xi will take China further away from the global economy -- at least from the Western part of the global economy -- as they focus on commodity gathering and working with the countries that they can trade freely with (on higher tech products).