Inflection Point

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This Week

Inflection Point
MACRO
- US macro update
- EU macro update
- Global CB action update
TECHNICALS
- Rates/ Bonds
- Credit market
- Stock market Indices
- Cross assets performance heatmaps
- Momentum, Trend, Exhaustion scores
“…one more thing…” :

@MacroTechnicals 2022wk32

* this is not a trade recommendation and for educational purpose only. please do your own research.

The whole financial world is looking at the Fed, the US$, the US interest rates, and the US stock market. That’s old news. Correlations are very high, if US bonds move in either direction, so do most of the other global bonds. If the NDX or SPX moves up or down, so do most global local indices in tandem.

The question everyone is asking: was June the bottom of the correction or are we still in a bear market rally ?

In June, markets were clearly very oversold, everyone “and his barber” was short or flat and sentiment was literally 0. Typically, this was followed by short covering, some bargain hunting, CTA systematic momentum trend followers, corporate buyback programs, gamma short squeeze, it was all there.

Let’s take a quick look at how cross-asset global markets were 14 June 2022 (the then US yield peak): here is the old version of my overview with momentum, trend, and exhaustion scores separated: technically a rebound/retracement had the best odds. Bonds, stocks, credits oversold, crude oil/ energy sector overbought.

And here is the same overview for last Friday 14 August 2022, two months later: certainly an interesting reversal and rotation since mid-June, and while momentum is obviously very strong (short-term indicators), the trend is now flat (of course, because prices reverted to the long term mean).

As usual, risk-on or risk-off is near correlation 1.

VIX implied volatility coming off sharply, went from backwardation to normal contango curve, “leading” the risk-on-rally across assets. Bond yields and credit spreads reversed too, cyclical vs defensive sector rotation, growth vs value as yields got lower. So, it’s all the same trade.

S&P500 vs various indicators, US$, relative value pairs:

So far, so good. Previous blogs always mentioned the rebound, the “bear-market-rally”.

And now, we are at this inflection point.

Bulls vs bears.

I have the impression, 50% of the market is currently still underlying bearish (“hey, stocks now back to mean, touching the down-sloping long term trendlines and moving averages, and yield curve is extremely inverted, ISM keeps falling, Fed not done etc”) and the other 50% are bullish, because they are always bullish.

One reason could be they are different generations.

I wouldn’t be surprised if there was a survey of bull/bear in age groups, it would skew towards bearish with traders/investors experience since 1990s, having gone through Asian crisis, dot-com bubble and burst, housing bubble and burst, Eu debt crisis and bailout. True bear markets. After excessive risk taking, a very aggressive Fed to “cool down and trying to soft-land the economy”, then reversed to aggressive rate cuts as recession kicks in. Over and over and over again. The CV19 global lockdown was a different kind of beast, unprecedented and a shock, resulting in the gigantic fiscal and monetary rescue policies, but that was not a bear market, that was a market crash. Very different actions, reactions, risk management. But that’s why there is this old saying: “there are bold traders and old traders, but no bold old traders”. They all learned their lessons, tried all tools, but experienced all different upswing and downswing economic and market cycles.

Where I have the impression, the post-GFC generation, a new breed of traders grown up only with the fast internet and trading platforms, leveraged accounts to hop into call options, can move markets wilder with today’s retail aggregated size and the resulting gamma squeezes. That generation either had zero or low interest rates for a very long time, and if there was some market panic (2018, 2020) the Fed reversed gear, stopped QT, started cut cycle and QE again or the latest emergency package.

Anyone actively trading since June 2009 never experienced a true bear market which lasted years. So, of course, they tend to be perma-bullish. There is simply no reason for a bear market. Small corrections (excluding the unprecedented CV19 shock, where the stock market immediately found the bottom, so, by nature they grew up BTFD syndrome.

The stock market is a leading indicator, and apparently everything is always already priced in.

Really ? Was everything priced in the stock market in 1998 ? 1999 ? 2006 ? 2007 ? So, now, the market has priced in the Fed hiking and to what level, priced in the QT program, priced in rising jobless claims, falling inflation, sanctions on Russia, energy crisis in Europe. And that’s that. June S&P500 low supposed to be the bottom and now to the moon.

How often did inverted yield curves signal recession within 12-18 months ?
For how long was a very restrictive monetary policy supportive for the stock market ?
How long did an overheated low unemployment rate last before reversal and recession started ?
How long can the business and consumer really work well-oiled with high interest rates given todays debt sizes ?
Why are longer term bond yields trading through shorter term ? Inflation vs growth outlook improving ?
How often did the stock market ignored underlying problems and kept going up ?
Time will tell, if this time it will finally be different !

For now, I will stay with my opinion: stock market rally may continue, I certainly never ignore momentum and strength, but I also believe, there will be a time for long term investors to pick up stocks a lot cheaper.

The only thing what’s missing right now is a catalyst. 9/11 2001 wasn’t the reason for the 2000-2003 bear market, that sad event was one of a few catalysts. Lehman default Sep2008 was not the reason for the 2007-2009 bear market, but huge catalysts on top. The downturn so far was due to re-opening mismanagement bottlenecks, global supply chain disruption, very high inflation, gigantic money supply, and extremely high energy prices. There will be a catalyst in 2023 which is not known yet. China ? Taiwan ? Something else ? I wouldn’t be surprised with the current situation and long lasting problems, the stock market will see a proper better valuation in 2023 or 2024. I wish I have a crystal ball.

Are we honestly back again to FOMO ?

MACRO

US

The Good, The Bad and The Ugly…

Inflation peaked, NFIB small uptick, UoM (flash) rebound
Inflation is still extremely high, jobless claims going up, Fed continues to hike + QT
The inverted yield curves, still ultra low consumer confidence

The two data points (literally the whole world) everyone is watching: US inflation and employment reports.

At last ! Inflation has peaked ! This was not only a short term relief for the market (even slightly lower than the lower expected number), but certainly for the lagging-reacting economists and policy makers at the Fed. Some components like used cars already dropped like a stone since months, but shelter remains another factor. But overall all leading indicators have been screaming lower CPI print for a while. The recent gap is highly unusual and calls for an anomaly. Business surveys and commodities pointing to an average of ~3.0%. And as PPI falls, so does CPI, and then PCE. It’s written on every wall…

The other data “dependency” point of the dual mandate – the employment situation – is more of a mixed bag. NFP was strong, although, with a very high number of part-time workers, the unemployment rate moved to a new low 3.5%, which remains a sign of overheating. But these are lagging indicators, ISM/NMI surveys show the weakening trend, and jobless claims are slowly going up for months now.

Together, this leaves my own interpretation of the not-working-Taylor-rule at a fair value of ~3.5% Fed Funds rate. STIR FF curve moved slightly less aggressive for the next FOMC meeting in September after the better-than-expected CPI report, but clearly is pricing in a lot more hikes, restrictions, plus the QT, which they may or may not even increase.

EUROPE

On top of the existing and very harsh energy crisis, importing fewer NatGas or Oil from Russia due to the sanctions comes the heatwave and drought. The Rhine is one of the most important rivers to transport goods (including coal) through Europe. Shallow rivers make it difficult for barges and there are estimates 400,000 barrels a day of oil products could be disrupted, Uniper has warned it may cut output at two key coal-fired power plants in Germany. (The left pic seen via @SStapczynski on Twitter).

In other words, “the German Green party famously fighting to switch off nuclear power plants are now finding out the alternative is dirty coal power plants can’t be supplied the coal shipped by barges via the Rhine due to low river levels. ( via @MichaelAArouet) .

The heatwave and drought obviously isn’t just risky to have wildfires, but it could damage wheat, rapeseed, maize crop in Europe. As if the Ukraine “Europe’s bread basket” disruption wasn’t enough.

That makes you wonder, when does the recession start and how deep and how long will that last?

Central Banks action

Thailand finally joined the hike cycle, BoT raised +25bp to 0.75%. Amazingly, CPI is at 7.6%
Mexico hiked for the 10th time, another +75bp to 8.50%. That’s a total of +450bp since the start, Current CPI stands at 8.15%

TECHNICALS

“Watch every tick, trade like a d*ck”.

Every data release creates a lot of noise, it’s an algo party and mostly, there is one winner: the broker getting commission. Either you have the correct position beforehand, otherwise, trading the data vs algos is impossible, the trading gaps are so fast and so large, manual trading against this is pure speculation and adrenaline push.

Here a good example since the last FOMC, including Powell presser, GDP, ISM, NMI, NFP, CPI reports.

RATES

US

The US yield curves (2s5s, 2s10s etc) are still heavily inverted, we all know what historically that means. While there is always room to go (“records are there to be broken!”), it is getting tough. IMHO, the deeper the inversion, the higher the chance of a bad recession 2023.