Oct 12, 2023
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“You can never cross the ocean unless you have the courage to lose sight of the shore.” – Christopher Columbus
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Inflation data and the upcoming earnings season have been the short-term focus of investors lately, but from a long-term perspective, today markets the one-year anniversary of the bear market low from last year. While the S&P 500 remains below its highs from late July, it is still up over 20% from the closing low a year ago today. Happy Anniversary!
Yesterday’s data was the warmup, but today’s CPI report for the month of September is the main event in a market that has been hypersensitive to inflation data for several months now. As shown in the chart below, the S&P 500’s trailing 12-month average daily change on CPI days has been above 1% since August 2022 and peaked at just under 2% this January. The only other time since 2000, that the S&P 500 was more volatile on CPI days was at the height of the financial crisis from late 2008 and through 2009.
Over the last two months, the S&P 500’s change on CPI days has been much more toned down with a gain of just 0.03% following the July report in August and a gain of 0.12% after the August report last month. Those subdued readings have taken the 12-month average down to 1.11%, and unless the S&P 500 moves up or down 1.25% today, the 12-month average will fall back below 1%.
The September CPI report just hit the tape and the results came in generally higher than expected. Headline CPI rose 0.4% m/m versus forecasts for an increase of 0.3% while core CPI was right in line with forecasts. As you might expect, equity futures have given much of their earlier gains while rates are higher. Obviously, these higher-than-expected readings in yesterday’s PPI and today’s CPI show that the road to lower inflation is a windy one. Jobless claims were also just released, and initial claims were pretty much right in line with forecasts while continuing claims rose more than expected.
Similar to the charts we showed yesterday of the PPI relative to its historical average, below we show how current levels of headline and core CPI on a year/year basis stack up relative to history. At the headline level, the current level of 3.7% is below its 50-year average reading of 4.0% but still above its 25 and 10-year averages of 2.5% and 2.7%, respectively. On a core basis, the picture is even worse with the current level of 4.1% above its 50 (4.0%), 25 (2.5%), and 10 (2.7%) year averages.
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Oct 11, 2023
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“The more I see the less I know for sure.” – John Lennon
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US equity futures are pointing to the fourth day in a row of gains this morning as last week’s oversold levels, positive seasonals, and a lack of escalation in the Middle East have all contributed to the positive tone. The fact that US Treasury yields were sharply lower again after some non-hawkish commentary from Fed speakers like San Francisco President Mary Daly and Fed Governor Michelle Bowman has also helped. The only thing left to get through was PPI, but unfortunately, those numbers were on the hot side.
PPI for the month of September was just released, and the headline reading came in much higher than expected (+0.5% m/m vs 0.3% m/m expectations). The core reading also topped expectations at 0.3% compared to forecasts for a reading of 0.2%. Those readings took the year/year levels to 2.2% (versus 1.6% expectations) at the headline level and 2.7% on a core basis (2.3% expected).
As shown in the charts below, the move higher in headline PPI has sandwiched it right between its pre-COVID average of 1.7% dating back to November 2010 when the current iteration of Final Demand began and its overall average of 2.6%. On a core basis, September’s reading of 2.7% is above its overall average of 2.6% and nearly a full percentage point above its pre-COVID average of 1.8%. There’s still some work to do on the inflation front!
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Oct 10, 2023
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“In nine times out of ten, the slanderous tongue belongs to a disappointed person.” – George Bancroft
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Global markets are picking up the rally where the US left off yesterday. Some of that positive tone is following through to US markets this morning, but equity futures are only modestly higher. Small business sentiment was modestly weaker than expected, and as discussed in this morning’s report, has confirmed the message from a number of other indicators that the labor market is moderating. Bond yields are lower relative to Friday’s close, but they have erased just about half of their initial declines.
In last week’s Bespoke Report, we highlighted the fact that through last Thursday, while most equity indices and other assets were all in steady downtrends over the last few weeks, the dollar was moving in the other direction and steadily rallying. Two trading days later (or one and a half if you consider the fact that Monday was a holiday for some), we’ve started to see a reversal of that trend as assets have been rallying and the dollar’s rally has taken a breather. The dollar’s weakness yesterday was even more notable given the geo-political tensions in the Middle East given the dollar’s typical safe-haven status. It’s only been two days, but as the saying goes, once is random, twice is a coincidence, but three times is a trend.
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Oct 9, 2023
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“When you know people, you have to behave towards them like human beings.” – Oskar Schindler
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Whenever we get a major episode of geo-political unrest, especially when it pertains to the Middle East, there are some things you can count on in the market- equity futures trade lower while oil, gold, and treasuries rally. This morning has been no different. Equity futures are trading over half a percent lower, gold is up 1%, and after a horrendous week for crude oil, WTI is trading up over 3.5%. Turning to the bond market, with banks closed for Columbus Day, there is no official trading in the treasury market, but you can get an idea of where the market stands by looking at other areas of the market. Treasury-linked ETFs are one example. In pre-market trading today, the iShares 20 Plus Year Treasury ETF (TLT) is trading higher, but the gains are hardly convincing.
As shown in the image below from Google Finance, as we type this, TLT is trading up 10 cents this morning or 0.12%. That would only be enough to erase a fraction of Friday’s losses or basically the declines that took place in the last eight or nine minutes of trading. That’s how bad the current environment is for the US Treasury market right now. Not even a major outbreak of geo-political violence can spark a rally these days.
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Oct 6, 2023
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“I don’t have anything else to prove” – Michael Jordan
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Futures are modestly higher this morning as markets are just digesting the September non-farm payrolls report. Michael Jordan claimed he had nothing left to prove when he announced his retirement on this day in 1993, but he ultimately realized he did and was back on the court in March 1995. The stock market may have felt it had nothing left to prove when it was at its highs last July, but just over two months later it now has plenty to prove, and bulls are starting to get impatient.
The September payrolls report just hit the tape, and the headline reading came in much better than expected as total payrolls increased 336K versus forecasts for an increase of 170K. While the headline number was much better than expected, the Unemployment Rate was unchanged at 3.8%, which was higher than the 3.7% forecast. Likewise, average hourly earnings were also slightly weaker than expected. The initial reaction in futures has been a sharp sell-off in stocks and bonds as the headline number topped forecasts, but underneath the surface, the report wasn’t as hot as it looked. Job creation is rising, but the cost of incremental workers hasn’t been accelerating.
In terms of market reactions to recent Non-Farm Payrolls reports the fact that the market is swinging widely shouldn’t come as a surprise. On the last 12 report days, the S&P 500’s average daily move on Non-Farm Payroll report days has been 1.1% (up or down. That’s up sharply from a year ago and near the high end of its post-financial crisis range.
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Oct 5, 2023
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“The daily blips of the market are, in fact, noise — noise that is very difficult for most investors to tune out.” – Seth Klarman
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After a ‘rare’ rally yesterday, equity futures are lower again this morning even as crude oil and treasury yields are lower on the day. Treasury yields were lower, but jobless claims were just released and came in lower than expected on both an initial and continuing basis. The strength in initial jobless claims has been especially impressive as the four-week moving average has dropped to its lowest levels since February. With bonds looking for any excuse to sell off, the better-than-expected jobless claims report has sent yields higher.
The title of yesterday’s Morning Lineup post was “And Then There Were None”, and we discussed the fact that after the Energy sector’s decline to kick off the week, the ETF that tracks it (XLE) joined the ten other S&P 500 sector ETFs in trading below its 50-day moving average. That was the first time since October 3rd of last year that every sector was below their respective 50-DMAs, and while the Energy sector was only marginally below its 50-DMA, it quickly made up for lost time yesterday by falling more than 3% and into oversold territory. As shown in the chart below, after hovering just below its 50-DMA yesterday morning, by the close it was treading water just above its 200-DMA, and the uptrend line that had been in place since late June has been shattered. Moving forward, both the 50-DMA and the former uptrend line have the potential to act as resistance.
Along with the weakness in the Energy sector, crude oil has been on its heels as well. A week ago, WTI briefly traded above $95 per barrel after rallying more than 42% from its June lows. Anyone who knew anything was saying that crude was back on its way to a triple-digit price. In just a week, though, prices have slumped over 10%, and in yesterday’s swoon, prices broke below the uptrend line from June, the 50-day moving average, and the high from August – that’s a lot of broken support all at once! If crude continues to follow the recent path of the Energy sector, it could be a painful few days.
Regarding the recent moves in crude oil, it’s funny to think that less than two weeks ago the run-up in prices was attributed to a stronger economy. Now that prices have started to fall, the narrative has quickly shifted to an economy that’s slowing. Does the direction of the global economy really turn that fast? If you’re using day-to-day moves in a volatile commodity like crude oil as your gauge for the health of the global economy, you’re going to go deaf.
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