Those Damn Swaps
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S&P 500 and especially real assets didn‘t take kindly to the serious whiff of risk-off that was manifest more so in financials (banking) than the dollar. Overshadowing the China reopening where yesterday mentioned $BABA.didn‘t disappoint (still room to run), the 500-strong index gradually and increasingly lost ground during the regular session.
The overnight bounce has been weak, not taking out 4,010 conclusively (yet). The bulls lost the momentum on the second, more promising push than earlier in the European morning – 3,980 is proving resilient after all, but watch out below should it be taken out. At the same time, there is more medium-term bullish fuel to come for all the reasons mentioned yesterday.
(…) Friday‘s aftermath of NFPs makes it clear that market Fed pivot guessing games are very much alive and well. It‘s as if a nice lagging indicator‘s figure were to result in more Fed hawkishness, in higher hikes immediately next.
That‘s not the case though – I continue standing by 50bp in Dec, 25bp in Jan and 25bp in Mar. 5.50% Fed funds rate and keeping there for long in a bid not to tip the economy into recession, but only to make it grow well below its potential – I told you this over a month ago already. They wouldn‘t though succeed, and the recent pronouncements reflecting caution about seeing all the tightening effects play out, reflects that perfectly. Looking for a crash though, and a very deep and long recession?
Don‘t be, that‘s currently not my leading scenario. We would see GDP decline peak to trough by perhaps up to 2% with unemployment rate rising over 3% - this wouldn‘t approximate even the 2007-2009 crisis. As I am looking for trouble to arrive a bit before mid 2023, we have still time to see that reflected in earnings and guidance. It‘s not all about the inverted yield curve, which got inverted some more already – the larger money flows between the Treasury, Fed and banks don‘t yet support deeper downside in stocks.
Trepidations before the Q4 rally peters out as it stretches into early Jan? OK, that‘s my base scenario. What are then the key levels for today? 4,040 to hold as support otherwise we may visit the 4,010s again, and these really better hold. Nothing unmanageable. 4,065 remains the goal on the upside, with more work ahead as we grind toward 4,130.
It ain‘t easy, this climb – the Fed is tightening into a slowing economy (see PMIs and then hello housing, manufacturing), inflation has credibly peaked (we celebrated that on Nov CPI already), and deterioration is still to hit the job market. Watch hourly earnings, hours worked, and where those job gains come from – hospitality, leisure and retail, that‘s not a good sign, it‘ll cascade eventually into consumer confidence and retail sales as households burn through extra savings (the most vulnerable ones have already – they are now at the mercy of job market (hiring) and wage growth (currently still driven by household inflation expectations, which are higher than what‘s seen in the data, and definitely something that the Fed wants to break). Labor market adds certainly to profit margins pressure.
Moreover, the Fed is not only tightening, but draining liquidity, $60bn a month in Treasuries and $30bn in mortgage backed securities. And where are foreigners, lining up for fresh debt issuance? Yeah, that‘s the larger trouble ahead.
Time for big piture sectoral picks going beyond stocks – I continue being bullish on silver with gold incl. miners, energy ranging from oil to renewables to nuclear, agriculture (incl. fertilizers, $DE), defence sector with aerospace ($BA etc). These will benefit during the increased volatility and sticky inflation to be with us in 2023 and beyond.
What we saw yesterday, is fear of systemic risk creeping in – as in foreboding. It ain‘t here yet, no matter what $CS and its CDS are doing (CHF would likely be a well performing currency later next year, alongside JPY) – the Fed stands ready to help wherever significant cracks overseas are appearing. Yesterday‘s reaction and what is still to play out before markets have a fundamental catalyst to turn on (Friday‘s PPI), demonstrates fear of the unknown.
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Let‘s move right into the charts (all courtesy of www.stockcharts.com).
S&P 500 and Nasdaq Outlook
Back midway to the range, rising volume – the bulls don‘t have the initiative, especially not in the slow opening weeks of Dec.
Credit Markets
The degree to which HYG gets its act together today, would be most telling, I wrote Friday and yesterday – and it shows how the tables have turned yesterday. Ideally, let‘s not break below the line connecting recent HYG lows.
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