Morning Note: The Proverbial Inflection Point

So, with history as our guide, the degree to which fed funds futures are pricing in a .75% hike today virtually assures that that’s precisely what J. Powell and team will deliver. Now, there are a number of pundits calling for something yet more aggressive, which I’m guessing is a non-starter, and, like I said yesterday, should they go .50%, then that says Monday’s meltdown indeed rattled their nerves.

I.e., while indeed a plunging stock market would do some of the heavy lifting for them on inflation, it could also, reflexively-speaking, ultimately be the straw that breaks the economy’s back, hence the Fed’s potential nervousness… Call it the reverse wealth effect.

Now, having said that, with regard to Fed policy itself, there of course is the proverbial inflection point, and markets will try to anticipate it. I.e., assuming they continue to tighten (they will for the time being) there’ll likely come a day when, say, the Fed bumps rates higher and/or increases the pace of QT (balance sheet reduction), and, lo and behold, market interest rates plunge and stock markets rally. That would be the day when “the market” knows they’ve gone too far and will have to lickety-split reverse course and open back up the liquidity spigots.

Now, allow me to take issue with myself on that last paragraph. I mean, if indeed the market sniffs out a Fed-forced recession, wouldn’t the history-proven reality that that’s wholesale bad for the equity markets send stocks into a tailspin? I mean, history says the Fed will indeed go bonkers with easing, but that they’ll fail to rescue stocks from, say, a 50+% shellacking — which, for the S&P 500, captures the peak to trough performance of the past 2.

Well, definitely, I have a legitimate issue with myself on that one. But then again there’s the 2020 experience. The degree of intervention from both the Fed and the politician was gargantuan enough to do the previously impossible; arrest a deep recession in its tracks and limit a bear market to a historically-brief -35%. Maybe they go there again?? 

Well…. yeah… but, then again, there’s this nasty, NASTY!, inflation that followed.

So would they indeed go that far yet again???

One day, I suspect we’ll find out…

Definitely all eyes are on the Fed today, but there are other central bankers grabbing attention as well. Overnight, European officials announced an emergency meeting to discuss market conditions. Our Eurozone ETF is up 1.84% on the morning. Come Friday the Bank of Japan meets and deals with a historic, and globally-consequential, plunge in the yen. A plunge of their own making that is having them pay lip service to taking measures. Thing is, they’ve been painfully-stubborn with their commitment to easy monetary policy and yield curve control, which is precisely what’s troubling the yen…

With regard to the Fed, and to US markets, judging by this morning’s rally investors are either comfortable with a .75% hike, or are in utter denial and believe they’ll stick with .50. And, keep in mind, as we’ve been reporting, there are a mountain of put contracts about to expire — (contracts that dealers had to hedge by shorting the underlying securities) — that ultimately resolves in some not-small short-covering on the part of options dealers.

With regard to that mechanical short-covering just mentioned, it’ll likely ramp up today should the Fed deliver something market-friendly. If, however, the Fed disappoints equity investors, it gets pushed out potentially as far as next Tuesday’s sessions (Monday’s a holiday).

One would think that that short-covering alone would spark one of those massive bear market rallies, and it very well may, but nothing’s assured in markets — a wave of overwhelming selling could indeed emerge to absorb the buying… 

In either event, our work still says lower lows before this all plays out… Good news is, it’ll all eventually play out…


Asian equities suffered overnight, with 12 of the 16 markets we track closing lower.

Europe’s in rally mode so far this morning, with all but 1 of the 19 bourses we follow trading higher as I type.

US stocks are up across the board to start the session: Dow up 382 points (1.26%), SP500 up 1.51%, SP500 Equal Weight up 1.55%, Nasdaq 100 up 1.88%, Nasdaq Comp up 1.84%, Russell 2000 up 1.75%.

The VIX sits at 30.37, down 7.10%.

Oil futures are down 0.65%, gold’s up 0.81%, silver’s up 2.58%, copper futures are up 0.12% and the ag complex (DBA) is up 0.13%.

The 10-year treasury is up (yield down) and the dollar is down 0.32%.

Among our 38 core positions (excluding cash and short-term bond ETF), 35 — led by Dutch Bros, MP Materials, silver, Disney and uranium miners — are in the green so far this morning. The 3 losers are South Korean equities, Albemarle and our energy stocks ETF.

In the interest of time this morning (mid-week market snapshot video to get to) I’m simply going to quote myself quoting Charles Goodhart yesterday — it’s definitely one worth repeating:

Unfortunately, while the following applies to policy, in the real world it too often applies to investing as well:

“…underlying trends become dominated by short-run shocks and policy responses. A related failing is that factors that dominate short-term forecasting are then given too large a role when it comes to constructing a long-term view.”

–Charles Goodhart, The Great Demographic Reversal


Have a great day,
Marty

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