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Market Summary—What recession?
Week’s Analysis/Podcasts— Manipulation rolls up hill, the next 90 days
Stocks did well this week. Fed speakers all week focused on dissuading any doubts about their inflation-fighting mission. This was on the back of Zoltan Pozsar’s latest missive extolling the virtue of doing just that. Their main talking points seemed to be: There will be no dovish pivot, we're battling inflation, and don't expect rate-cuts next year.
It was almost like they were begging us to believe them, especially given their recent loss of credibility with the transitory fiasco. And for much of the week, the markets did not believe them.
S&P was stronger
Nasdaq was stronger
All the US Majors closed back above their 100DMAs this week.
This week's violent surge higher was driven by the biggest weekly short-squeeze since Jan 2021 . People were taking off their hedges and recession plays
Ignore the Fed, Not the Data
Between Monday and Tuesday morning stocks seemed to cautiously heed Fed warnings by trading slightly lower. But on Wednesday the markets exploded higher. Then Thursday they continued ramping. Stocks seemed to alternatively listen to, then laugh at Fed speakers’ claims all week as it rallied on good, bad, and indifferent news. Fed-speak seemed a joke before Friday’s data.
Then the NFP/Unemployment numbers came out and the euphoria evaporated. “Friday morning's 6-standard-deviation beat in payrolls really stole the jam out of the exuberant donut the market had been hoping for”1
Stocks and bonds dove. Stocks however clawed their way back up. Bonds did not. The bond market right now is the most ”accurate” in that it has renewed its belief the Fed will tighten even more based on the robust employment, wage pressures returning, and the next CPI print in the wings. Bonds believe the Fed will do what it says. Stocks however, remained buoyant.
Stocks Remain Strong Despite
Stocks are vulnerable of course based on this news. Yet they remain strong. Why? There just is still too much money plowing into them post earnings season that had been on the sidelines. Further, there are many shorts that need to cover recessionary hedges. Which incidentally is why Silver screamed higher 2 weeks ago. Shorts hedging recessionary fears covered. There just is a lot more money to go back into stocks than Silver now.
Tactically, the thinking is stocks remain vulnerable to the news, but if CPI comes in lower than expected, they might weather the storm next week. If on the other hand, CPI and other inflationary data come in remotely hot the Fed will likely be laughing as stocks crater. Fridays’ late day re-rally in bond yields warn against this. So how is employment strong but we are in a recession?
People are working, but not making enough and spending to make the difference…
via Zerohedge
Redefine Everything
We believe more data indicators are just broken.The definition of recession will soon be described as no longer accurate as to what a recession is. Therefore the definition will eventually be changed. But why is the definition of recession possibly no longer reflecting the economic reality? Because like everything else, it is an indicator broken by abuse.
We contend that manipulations of data, changing other indicators, using indicators as targets, and other bias-reinforcing rationalization tools have tortured the last remaining valid economic indicators.
Nothing works reliably anymore. Gold is down with 9% inflation. Employment is strong but consumers are not spending. Households are in good shape, yet credit card use has skyrocketed. Stocks are up, but they are down. Traditional measures are no longer working. The result is more bifurcated data.2
The K Continues or…Best Recession Ever!
Since the first bond curve inversion back in March and the subsequent technical recession it correctly predicted,3 STIRS have begun predicting an abrupt stopping of rate hikes by early 20234. We are in a recession but it does not feel like it. What has happened since March has been extremely logical if you look at it “properly” in our view. That is to say, splitting the economy. Look at rate hike expectations for example.
Ever since Covid the world and our economics have become one big “K” which we bring up from time to time. Markets continue to bifurcate. Rate expectations are also now even more split in accordance with this concept.
More and worse divergence between the present and the future…
Another K shaped graph
Compression of Expectations
As inflation remains sticky and higher, rates and bond yields have reflected more and more hawkish behavior between now and then. But the line in the sand between hikes and easing has held fast. It seems every time the bond market discounts more rate hikes in the short term, it discounts more rate easing in the longer term. There has become a perverse equilibrium between the hikes expected now, and the easing expected later.
Hike Now, Ease Later
Every time the Fed tells us it will fight inflation more aggressively the bond market reflects that more or less. Yet almost simultaneously the anticipation of Fed easing also increases soon after this ”hiking cycle” kicks in. The point is, that yawning chart gap continues to widen. It must start to converge doesn’t it? If it does not, as time moves forward (as the future becomes the present) we will eventually be raising while we are easing at the same time!
Dude, how can we be easing when we are supposed to be tightening…
Crash Now, or Crash Later
Either the market's expectations of policy reversal are wrong and must move further out on the timeline because the Fed isn’t going to ease any time soon; in which case the market recalibrates its timeline of rate eases and crashes as hopes are dashed.Or some event precipitates a market crash forcing the Fed's hand to pivot and abandon its hike cycle early. A battle has begun.
It certainly seems either like crash now due to Fed error or crash later on Market's dashed expectations.. or a soft landing.
Pozsar talks tough love in his current note and says the market must crash by adjusting expectations:
Between a deep recession and damaging the Fed’s reputation as an institution, a deep recession is the lesser of two evils. The former is public service, and the latter is public disservice. The former is a central banker’s clear conscience, and the latter is a life-long burden. Whether Jay Powell will succeed in slaying inflation is not the question; in the context of economic war, we can doubt that. Rather, the question is whether he’ll try his best to slay it. There I have no doubts.
The problem as Zerohedge notes in a premium post late last week is the Fed thinks it is apolitical and can also manage expectations of a market it has facilitated addiction to printing for 15 years in just one hike cycle.
Lets assume the Fed is not political (although we know they are and have the proof by one of their own here) for a moment. Here’s what ZH says to Pozsar’s above comment.
The problem with this line of thinking is that Pozsar thinks anyone - whether Congressional Republicans or Democrats - will agree to a "depression" just to contain inflation. Spoiler alert: they won't as it means an immediate end of all their political (and all other careers). Instead, they will browbeat Powell and the Fed, into doing just enough to avoid this outcome even if it means raising the inflation target, which we are 100% certain is how this episode ends: with the Fed raising its inflation target quietly from 2% to 3% or more, with the usual hedonic adjustments of course.
The politicians who run the Fed are pretty much, well… politicians who want to get re-elected. So they will not let voting investors get too worried. The addiction will continue.
Pozsar’s line of thinking is too rational for its own good. It assumes participants are not acting for their own survival. It also assumes the public will happily lose trillions of dollars for the common good when they’ve been told all this by leaders who only take care of themselves.; whether it be Fed officers trading stocks, Dr.s getting paid by Big Pharma or Senators trading on inside information. Pozsar sounds almost communistic in his belief the country will pull together under these types.
So how should it converge? Many including us, think it should converge with the red line dropping down (Fed reversing policy before they get to their target) to meet the green line when something breaks.
What happens when something breaks…
And let’s face it: The Fed almost always has to stop raising rates because something they didn’t think of breaks. Almost every time.
Something always breaks and they reverse…
Summarizing: We and people that know more about this than we do have believed the Fed, by fighting the current war (inflation) too aggressively will eventually break something. That something may come in the form of a major company collapse, the stock market can crash, or an economic crisis in Europe. These can force us to back off tightening. That opinion is warranted based on the graph below.
But what if, after Friday’s data, we don’t get a lower CPI number next week? 5 What if, as Zoltan Pozsar implies almost fanatically in his most recent note that: the Fed will keep on hiking anyway. The Fed will not back off. That the economy can handle it.6 They could be right. But if they aren’t see above.
It is frightening to think that might be their position. At what point does Fed-speak cease to become jawboning and start to become intractable stubbornness? The transitory episode showed just how dangerous dogma can be. But it must be noted. The Fed thinks (or wants us to believe it thinks) that the yawning gap will close like this.
The Fed thinks they can change the market’s mind on rate easing….
Which brings us back to the splitting data. It’s definitely a recession but unemployment is dropping still. That is, If you believe the numbers are not cooked even with midterms coming up7
Crude was clubbed, crashing 10% and trading back to Putin invasion levels
Gold ended the week modestly higher but fell back below $1800 after the jobs print.
Bonds:
Rate-hike expectations soared this week (interesting subsequent rate-cut expectations also rose
Odds of a 75bps hike in September spiking to 80% (from 25% earlier in the week)
Treasury yields all ended the week higher with the short-end underperforming dramatically as hawkish reality was priced back in
Interestingly, today saw the market start pricing in a risk of an inter-meeting rate-hike (August Fed Funds futs saw heavy volume and an additionally 6bps of hiking priced in
Summary: We are raising our S&P 500 view from 4,200 to 4,400 in 2H22 following our 6/23/22 report We see an S&P 500 relief rally to 4,150(+10%) led by Cyclical Growth (Tech) this summer and our 7/17/22 report
Separating(1)the S&P 500 into 24 industry groups (GICS 2), our view is Cyclical Growth (top, right, listed 3 pages later) has a strong relief rally as inflation slows, Fed expectations are pulled back, and the economy has the balance sheet and momentum in 2022 to mitigate recession risk
To describe our position we provide three Question and Answer sections in this report:
We see an S&P 500 relief rally to 4,200 and prefer Cyclical Growth. We continue to prefer Cyclical Growth (Software, Media, Tech Hardware, Retail and Semiconductors).
FULL ANALYSIS AND DETAILED CHARTS AT BOTTOM
2- Goldman: Nonfarm Payrolls Surge
BOTTOM LINE: Nonfarm payrolls rose 528k in July, more than double expectations.The details of the report were also very strong, with +28k of positive revisions, a 611k gain in the methodology-adjusted household survey, and a decline in the unemployment rate to the lowest level since 1969. Average hourly earnings growth picked up, rising 5.2% year-on-year compared to consensus of 4.9%. Today’s report indicates an overheated labor market that continues to tighten further.
FULL ANALYSIS AND DETAILED CHARTS AT BOTTOM
3- Morgan Stanley: US Consumer Pulse Survey
Consumers Are Late/Missing Payments: Overall, 38% of consumers reported a missed or late payment on any bill/loan in the past three months, skewing higher among lower income cohort.
Consumers Are Trading Down when Purchasing Groceries...: Nearly two thirds of consumers are trading down to lower price brands in at least some grocery products. This trend is driven primarily by the lower income households.
…and Also Trading Down at Retailers/Restaurants: Overall, 70% of consumers report at least some changes to their typical shopping and eating out preferences.
FULL ANALYSIS AND DETAILED CHARTS AT BOTTOM
4- Nordea: What’s going on in the US economy?
This week, a number of FOMC members have clearly stated that the Fed is nowhere near a pivot to more dovish monetary policy. Today’s super strong nonfarm payrolls confirm the view and pave the path for more Fed hawkishness ahead.
Yet, US bond markets are acting like a US recession, and rate cuts are around the corner. We are not convinced at all and believe long-term bond yields will likely rise again after the summer, in part due to the Fed’s QT effect taking its full toll from September
Based on the latest GDP figures, the US is in a technical recession. Yet a lot of data points say that the US economy is far from recession.
Wage growth is still on the rise (5.2% YoY) and as long as labour markets remain tight, wage growth and inflation are unlikely to come down.
Unemployment is down to 3.5% and most worryingly for the Fed, the labour participation is slightly down again to 62.1%.
GoldFix Note: Do not attempt to use price levels without symbol explanations or context. Moor sends 2 reports daily on each commodity they cover. The attached are non-actionable summaries.
Gold:
Bearish down to $1677. Range-bound between 1677-1805
