Bad market, critical situation, treasure markets, 5 ways to proceed

The bad stick was around Wednesday. The stick was not shy in who or what it touched, and everything it touched was worse for it. Stock index futures had been trading higher early on. You may almost feel that a very negative trap has been set … for the market. Fed officials had been so hawkish in their rhetoric in and out of Jackson Hole. Did they know something the rest of us couldn’t? It just looked like that.

Consumer-level inflation for August, at least as currently measured by the Bureau of Labor Statistics, was recorded on Tuesday morning. It was hotter than expected. It was hot in all the wrong places. It sent investors running scared. Headline August CPI printed at + 0.1% month over month and + 8.3% year over year. Year-over-year printing fell from 8.5% in July, but both of these numbers were above consensus. Yes, even with the benefit of gasoline prices that fell 10.6% month over month and fuel oil prices that fell 5.9% month over month. These prices were somewhat offset by a 3.5% m / m price increase for the pipeline service. This did not bode well for the core rate.

In the center, the August CPI (excluding food and energy) peaked at 0.6% m / m, compared to 0.3% in July, and + 6.3% yoy, compared to 5.9% in July. This was the highest year-over-year print since the month this series peaked (March 2022). Almost a new peak. Nobody wanted to see him. August was also the second consecutive month that prices for hospitalization and medical care services rose above the trend after these two categories had been lagging behind for several months. The fact that consumer-level inflation may still spread to parts of the economy that haven’t been hit that hard isn’t just worrying, it’s terrifying.

The financial markets had obviously valued a much more interesting report than the one published. The S&P 500 lost 4.32%. The worst day for the broader large cap index in the US market since much of the country was on lockdown in June 2020. The Nasdaq Composite lost a nasty 5.16% as the Philadelphia Semiconductor Index hit 6, 18%. Small cap stocks “outperformed” with the S&P MidCap 400 down “only” 3.7% and the Russell 2000 down 3.91%.

One Way

They have roads after the results of the discovery of the price of the regular session on Tuesday … “One Way”. The losers beat the winners at the NYSE by nearly 7 to 1 and the Nasdaq Market Site by about 4 to 1. The increase in volume took a 21.5% share of the Nasdaq-listed composite trade and only a 5 to 5 share. % of that metric for NYSE- listings. A hard lesson has been learned from those who choose not to wait for any volume-based confirmation of a change in trend before allocating capital. For four consecutive days “get up”, we sounded the alarm on the volume. I haven’t heard that warning from anyone else.

The pros finally showed up on Tuesday and they weren’t bullish. Aggregate trading volume increased 10.8% on a daily basis for NYSE-listed names and a whopping 21.5% on a daily basis for Nasdaq names. The trading volume on the S&P 500 and Nasdaq Composite easily surpassed anyway, their trading volume is a simple 50 day moving average. Professional money was on the move Tuesday, trying to turn holdings into cash, but in many cases they were too late to get their price. Not everyone can use one door to get out all at once.

Action in the Treasury markets was key. The yield on the US two-year bond fell 18 basis points on Tuesday, reaching 3.75%, its highest level since October 2007. I see that particular yield trading at 3.78% this morning after hitting a peak above 3, 8%. The yield spread between the US 10-year note and the US 2-year note broke through a key trend line that had increased on Tuesday …

… The more deeply reversed stance of this spread reflects the now greatly increased doubt that the US economy may achieve anything close to a “soft landing”. Let me explain.

Critic situation

The US central bank, already convinced that aggression is the best way, will feel obliged at this point to act more courageously moving forward. The Fed will feel it must almost hurt the US economy to bring their dual mandate back into balance. In addition to the Fed’s quantitative tightening program that is only just beginning, the FOMC will need to raise the Fed Funds rate above the theoretical “neutral” rate, and will likely do so at next week’s meeting.

The deal is this. Many of you know this. Some of you may not. We often follow the Atlanta Fed’s GDPNow model for real-time modeling of economic growth. The Cleveland Fed publishes a Nowcasting model for real-time inflation and this model is reviewed daily. The Cleveland Fed model currently shows September CPI at 0.33% m / m and September CPI at 0.51% m / m. This would be up from BLS’s August prints (as of yesterday) by 0.1% and 0.6%, respectively. As for the year-over-year basis, Cleveland shows the current September CPI with a main growth of 8.21% and a main growth of 6.64%. This would again be up from BLS prints for August by 8.3% and 6.3% respectively. What Cleveland is telling us is that at the moment, core inflation is stabilizing where it is and core inflation is still warming. This is problematic.

This morning, I see futures trading in Chicago which is pricing a 66% probability for a 75 basis point rate hike next week and a 34% probability now for a full percentage point hike. This would take the Fed Funds rate from today’s range of 2.25% to 2.5% to 3% to 3.25%. Futures are therefore pricing in a 73% probability for at least another 75 basis points on November 2. This would place the FFR between 3.75% and 4%. The futures price now expects the FFR to end the year between 4% and 4.25% and the peak for the cycle in February 2023 between 4.25% and 4.5%.

Remember, it generally takes at least nine months in Main Street, USA (except housing) to feel changes in monetary policy. People have not yet heard most of what the Fed has already done, nor has it really begun to impact economic activity. According to the St. Louis Fed, the velocity of the M2 money supply actually increased for the second quarter.

We already know that credit card usage has increased dramatically. We learned on Tuesday that, according to the FDIC, deposits with US banks also fell by $ 370 billion during the second quarter. This was the first quarterly contraction in US savings since 2018 and the largest quarterly contraction in savings in US history. Yes, the speed increased during the second quarter. The good people of Gotham and elsewhere broke into their savings and borrowed to maintain the standard of living their families had grown accustomed to. That was before they lost their jobs, which are yet to come. It is then that the speed begins to drag on once again. That’s when it gets tough. Really hard.

Markets and you

My opinion is that traders need to stay “cash” in the wee hours and weekends. Investors who need to participate should reposition the weighting where exposure is greater to areas benefiting from something approaching inelastic demand. This is what the Fed is trying to do … destroy demand through an “inverse wealth effect” … This means that stocks must be traded at small multiples and that other real estate, such as real estate and precious metals, may also lose perceived value, although perhaps not in relative terms, as rates rise and the US dollar strengthens.

The areas that I consider inelastic would be public services, health care, national security and cybersecurity. There are more, but these are my areas of interest. Cybersecurity is still expensive, so that area is complicated. I bought the dip on Tuesday, starting new longs in two old friends … Northrop Grumman (NOC) and Palo Alto Networks (PANW). I’m going to grow both positions, but honestly who knows. Once I’m in a fight, everything changes.

How to proceed

Comprehend

Everything is for a reason. Slow down if necessary.

Identify

All avenues of approach, perceived threats and opportunity objectives.

To adapt

To changing environments. It becomes what is required when it is required.

Exceed

Find a way. Even in the face of persistent failure. Learn constantly.

Continue

With the mission. No beginning. Endless. In progress.

Yes you can. Screwed up? Messed up a couple of times? So be it. Correct course. Fight. Do you see that little boy in the picture on your desk? That guy thinks you’re a hero. Be that hero. Be a shining beacon, even if you have never been before, of all that is pure and good. Be what that guy thinks you are. Dedicate yourself to the task at hand. I know that if you are standing before sunrise and reading this, you are a force to be reckoned with. Now, stop it. Be yourself. Be powerful. All time.

Fear is only for the wicked. Therefore let the wicked tremble before us.

Sarge out.

Economy (All Eastern Times)

07:00 – 30 Year MBA Mortgage Rate (Weekly): Last 5.94%.

07:00 – MBA Mortgage Requests (Weekly): Last -0.8% w / w.

08:30 – PPI (August): 8.9% yoy expected, Last 9.8% y / y.

08:30 – Core PPI (August): Expecting 7.1% yoy, the last 7.0% yoy.

10:30 – Oil inventories (weekly): Latest + 8.844M.

10:30 – Gasoline Stocks (Weekly): Latest + 333K.

The Fed (All Eastern Times)

Fed blackout period.

Earnings Highlights (Consensus EPS Expectations)

Before opening: (DOOO) (2.63)

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