“As a result of our shortsightedness we are overfeeding the present by stealing from the future."
-Jim Brumm
The one thing I never imagined, working in this industry, is how easy it is to focus on the last event, last price action, or last day and forget about the long term picture.
It's as if the time between earnings and Fed meetings there is a complete lapse on what was reported/said just two months ago. Like Keith says, 2 months equates to 10 careers from now.
So yesterday, we go into month end, which over the past year has given us rallies, and behold. Our 0DTE line was the calls on the 405 line for SPY. Does that have anything to do with the cycle? Nope. So it begs the question: Is there anything today or tomorrow that will remind people of the cycle we are in?
Yes, we only have the FOMC, ECB, and GOOGL/AMZN/AAPL earnings today and tomorrow. What could possibly go wrong? Well, we will look at the Risk Ranges for that answer later.
Before I move on, here are some quotes from Powell the last time he talked:
- ”It will take time for the full effects of monetary restraint to be realized, especially on inflation“
- “The committee decided to raise interest rates by 50 bps… and we still have some ways to go”
- “We are taking forceful steps to moderate demand so that it comes into better alignment with supply”
- “Reducing inflation is likely to require a sustained period of below trend growth”
- “We will stay the course until the job is done”
- “It’s not so important to think how fast we go, its far more important to think what is the level, then at a certain point the question will be how long do we want to remain restrictive”
- “Our Focus is not on rate cuts or prematurely loosening policy”
- “We’re going into next year with higher inflation than we thought”
The messaging to me was clear: Higher for longer, kill demand. Although, to get a glimpse into the Old Wall, look no further than the questions asked to Powell. Every one of the questions was behaviorally about trying to out smart Powell.
Since the last meeting the S&P 500 went down -5.31%, then rallied +7.75%, making the overall gain since the last meeting +2.03%.
Back to the Global Macro Grind…
Based on the S&P 500 being up you would think that there were improvements to what Powell is looking for:
- Sustained period of below trend growth
- Inflation meaningfully down, and
- A spike in labor
Well, lets look at the data. Christian did a phenomenal job on Friday of outlining all of the most recent data. I’m just going to focus on ways to track where we are within the cycle based on what Powell believes. Yes, I’m not going to out smart him, I’m just going to take a walk in his shoes.
Growth
The last four readings for US GDP QoQ SAAR were: 1Q22 -1.6%, 2Q22 -0.6%, 3Q22 +3.2%, 4Q22 +2.9%. Over the past two quarters the US economy grew, despite Powell’s tightening. Then you look at the long term average (going back to 1947) and the average QoQ number is +3.18%, the average going back to 2000 is +2.02%, and the average going back to 2007 is +1.85%. I don’t know what Powell is using as “trend growth” but to me we have yet to see “a sustained period of below trend growth.” In fact, the last two quarters almost infer we have seen above average growth.
Inflation
US headline CPI of +6.5% YoY is at the highest level since June of 1982, US GDP Price Index of +5.0% YoY is at the highest level since September 1990, and US core PCE of +4.42% YoY is at the highest level since March 1989. Let’s combine these two quotes from Powell:
- “We’re going into next year with higher inflation than we thought.”
- ”It will take time for the full effects of monetary restraint to be realized, especially on inflation.“
Let’s also not forget the average core PCE from 1997 – Present is +1.9% YoY. The takeaway? We still have a journey ahead of us until inflation comes down to an “acceptable” level.
Labor
Initial jobless claims have come down for the past 4 consecutive weeks to the lowest level since April. How low was April’s reading compared to history? Only the lowest level in initial jobless claims since the 1980s. Using the ADP employment report, we have yet to reach the level of employment change of Aug 2021. Another more historical, math-based way, I took out the extremes of 2020 (which would have helped our case) then found the Z-Score of today’s labor market. The Z-Score is 0.22… 0.13 if you include the entire history (AKA labor remains benign for the time being).
Putting it all together
Putting growth, inflation, and labor together, and using Powell’s comments over the past year, there is no reason we see a pivot from his current stance. Which begs the question, why is the S&P 500 up since the last Fed meeting when there has yet to be any data to support Powell changing his current stance. The stance of, tightening into a #Quad4 slowdown.
But who cares "why," the price did what it did, let’s get the "when" right.
I do want to comment a little bit on this idea from Powell: “We are taking forceful steps to moderate demand so that it comes into better alignment with supply.” I look forward to the day I’m allowed to draw on the whiteboard to explain this. But for now, imagine supply being below a five-year range. In order to raise supply, you need your demand to be much less than a five year low. Once you have demand below a five year low, then supply will begin to normalize towards the middle of its five-year range.
Let’s look at the chart below that is showing gasoline inventory, which typically remains in a pretty tight band, although it has been and remains below its 5-year range since April of 2022. In fact, these levels are the lowest since ~2015, for this time period. Now, this wouldn’t be concerning if it was just gasoline inventory, the problem is you get the same story looking across major commodities (diesel, coal, corn, soybeans, cotton). This would also be less concerning on the oil front if, for the past year, inventories didn’t have the headwind of SPR usage from Sep 2021 till Jan 2023. But the fact of the matter is this headwind no longer exists (we are no longer releasing SPR). The only thing that will moderate the supply now, is demand itself.
Let’s wrap this up by giving an update on the most probabilistic outcome from here and then I’ll give a quick update on the earnings season.
Risk range probabilities using Upside to Downside risk (yesterday’s range and today’s price): SPX 0.2% : 5.0%, Nasdaq 0.3% : 8.2%, Vix 15.1% (22.5) : 7.3%, GOOGL 1.2% : 9.8%, AMZN 0% : 12.1%, AAPL 1.9% : 10.1%, TSLA 5.1% : 54.7%, and Bitcoin 4.9% : 19%.
Earnings Season for $QQQ 28 of 100 companies reported, earnings -12.8%.
SX5E (Euro Stoxx 50) 4 of 47 companies reported (earnings start today), earnings -14.9%.
$WGMI (Bitcoin Miners ETF) 5 of 19 companies reported (earnings has not started), earnings skewed by one company for now.
Since the chart of the day goes on Twitter, here is a chart of U.S. CDS. It’s making cycle highs and relates to the debt discussion on Capital Hill. I guess it pays to subscribe because this is not the most important thing on your sheet today…
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.38-3.64% (bearish)
UST 2yr Yield 4.07-4.34% (bullish)
High Yield (HYG) 75.18-76.56 (bearish)
SPX 3 (bearish)
NASDAQ 10,798-11,734 (bearish)
RUT 1 (bearish)
Tech (XLK) 127-139 (bearish)
Consumer Staples (XLP) 71.98-74.00 (bearish)
Healthcare (XLV) 131-135 (neutral)
Defense (ITA) 108-116 (bullish)
Utilities (XLU) 67.99-70.51 (bullish)
Shanghai Comp 3179-3310 (bullish)
VIX 18.26-21.66 (bullish)
USD 101.37-105.03 (bullish)
Oil (WTI) 77.05-81.42 (bearish)
Gold 1 (bullish)
TSLA 115-187 (bearish)
Bitcoin 19,414-24,278 (bearish)
Ryan Ricci
