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1. Market Summary
Stocks did well. Bonds did horribly. Commodities were mixed but overall firmer. The dollar was bid some. The week’s behavior can be summed up as: Stocks are still resilient, but signs of waning upside are showing again. Bonds have graduated from stagflation (flat curve) to increasing expectations of recession via beginnings of an inverted curve.
Rate hikes now: The Ukraine war-effect as it currently stands is not dissuading the Fed hike cycle. Bonds are corroborating that assessment. They got destroyed last week. Banks are also now more broadly accepting the Fed will raise rates more, (50bps 3x per JPM and MS.1) and quicker than they thought in recent weeks.
On the flipside: expectations of easing soon after the rate hike cycle is over are increasing as well. Why? It is likely the markets are starting to handicap rate hikes creating a mini equity crisis like previous cycles have done.
Almost every rate hike cycle since 1999 has created a large drop that either paused or reversed the hiking. Sometimes the crisis was external, sometimes the crisis was just too much bubbly behavior.
H/T Zerohedge for several charts and some data here
So, the market is hedging itself if another one of these happens again. We think it is way too early to start worrying about it, even though it is most likely going to happen again, if only an echo of previous events. Let’s get through the beginning of the rate hike cycle first.
Taken in combination with what was an eyebrow-raisingly bad week for Bonds, this all translates into what we think is Wall Street readying itself for a sell-off in stocks, or at least a stagnation in the rally. We might see some herd behavior Sunday night.
If history means anything anymore, all stocks are too high given the move in bonds. So we would not be surprised if calls to sell stocks and buy bonds started- flight to quality narrative stuff. This is also consistent with longer duration growth stocks (tech etc) starting to re-weaken vs value again in the second half of the week.
To bulls we’d say this: Relax, once the bond auctions are over we will find that stocks are actually being held back by the bondmarket.
There is a very large chance they may be fine. Why? Because Wall street may have just been front-running the large auctions in the upcoming week. If you think they will, you buy the dips if presented as the auctions approach.
One other thing- BoA’s Permabear Hartnett is not bearish right now.
Nasdaq and S&P outperformed
Small Caps closed lower
The Dow could not get much done
Rallies faded as the week went on
Growth outperforming value also stalled
Sectors:
Energy stocks strongly outperformed
Healthcare lagged
Financials managed modest gains
Commodities:
Oil prices ended higher on the week amid an avalanche of market drivers.
Gold and Silver were also up on the week.
Copper ended lower. - bearish stocks?
Dollar ended the week modestly higher- more rate hikes, war safety
Bonds: Mortgage Rates Go up Alot
In several statements above we described Bonds as weak and offered the implications for stocks.
long dated bonds dropped (rates increased), but short dated bond value dropped more. Thus from flat to inverted now
some of the curve is inverted to the 10 year now.
mortgage rates have exploded higher - at their fastest pace in decades
they have also decoupled dramatically from 10Y Treasury yields their historical tether
worst drawdown in global bond prices on record. Traded like penny stocks sometimes.
Crypto:
Cryptos rallied on the week, ETH and BTC each up around 6%
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.
When a market goes sideways as Gold has at these newfound higher levels, it is time to assess the chances of next moves, bigger moves, and price drivers. That involves a series of questions asked and hopefully answered honestly.
We want to be ready and clear of mind in the event Gold makes a major move one way or the other from here. There are several major open issues, some old and chronic, some new and acute. To the extent these are or are not solved they will drive price possibly hundreds of dollars in relatively quick fashion.
Here is our view on the top market drivers that started this recent move higher. Those questions are 1) What are the drivers for the next $200 higher? 2) Are they fully baked in?; and 3) What event could violently reverse things overnight?
What are the drivers for the next $200 higher?
Inflation
Fed Confidence
Ukraine War
1- Inflation is Intransitory
Gold rallied because inflation became broadly accepted as not transitory. For multiple reasons, Inflation is worse than leaders had perceived. The reasons for this are, depending who you talk to: Easy monetary policy, large fiscal stimulus, and supply chain disruptions, Antecedent causes being historically bad policies since the 2008 GFC, and the more recent Covid-19 pandemic.. and (bear with us on this one) China but not in the well known way.
Is inflation baked in?
Short term, yes. Long term, no. Supply chains cannot be reinstated or changed overnight. These are real things that cannot be fixed with pushes of buttons. And they are currently being completely revamped. The market agrees. From Goldman Sachs Macro desk:
I think this is a wildly interesting chart ...
BRINGING SUPPLY CHAINS STATESIDE
Long the beneficiaries of US onshoring,
We believe inflation actually is purely a monetary phenomenon, and has always been present since 2008. The Fed was merely deft at diverting money from assets it didn’t want to benefit from the printing…
