Dec 20, 2022
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“To lose is to win” – Japanese Proverb
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If the above statement is true, 2022 should end up as one of the best years ever. Right? Futures are mixed this morning, but there was still some big news overnight in central bank moves as the Bank of Japan raised the upper bound of its cap on the 10-year JGB yield by 0.25 percentage points to 0.50%. While the move wasn’t entirely a surprise, the timing was. Just yesterday, in our Morning Lineup, we discussed how this type of action would likely be taken in April when Kuroda retires from the BoJ.
While equity futures have seen little impact from the BoJ news, interest rates in the US are higher across the board this morning with the 10-year yield up to 3.66%. In economic news, the only data on the calendar today is Building Permits and Housing Starts at 8:30. Building Permits missed by a mile while Housing Starts actually posted a slight beat.
The Bank of Japan’s jolt to financial markets overnight had one of the most direct impacts on the value of the yen which surged 3% relative to the dollar. Besides just the last 24 hours, it has been a very strong two months for the yen. After the dollar peaked at 150 yen two months ago today, it has experienced a sharp move lower falling more than 10% versus the yen and looking at the chart in recent weeks, there have been a number of sharp single-day moves lower.
The USD/JPY cross is now significantly below its 200-DMA after closing below that level earlier this month for the first time since early 2021 – nearly two years earlier! Going back to 1972, that streak of 462 trading days was the longest streak of closes above the 200-DMA on record and just the fourth streak that lasted more than a year.
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Dec 19, 2022
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“Humbug” – Ebenezer Scrooge
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If there’s any consolation to this Monday morning, it’s that there are only nine trading days left to go in 2022, and it’s only fitting that the world was introduced to Ebenezer Scrooge 179 years ago today with the publication of A Christmas Carol by Charles Dickens. Futures are actually slightly higher this morning (but giving up ground as the morning goes on). News-wise, the next two weeks are likely to be rather quiet, and the only economic report on the calendar today is homebuilder sentiment at 10 AM. In international markets this morning, the only headlines of note are the fact that COVID cases in China are reportedly surging as the country rips the band-aid off of its zero-COVID policy, while in Japan, there is talk that the BoJ will finally revise its monetary policy to a more hawkish stance.
Last week was a disheartening one for bulls as the optimism of a break above the 200-DMA and the potential for a break of the S&P 500’s downtrend was quickly erased. Not only were bulls not able to break the downtrend, but the S&P 500 also gave up its 50-DMA as well.
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Dec 16, 2022
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“It isn’t what we say or think that defines us, but what we do.” – Jane Austen
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A bad week just keeps getting worse as futures are continuing their post-FOMC sell-off. Heading into this week, the thought of weaker CPI and the Fed signaling a step down to 25 bps hikes at future meetings would have been considered a positive. That’s exactly what we got, but after an initial surge following Tuesday’s CPI, equities have been doing nothing but trading lower. Hawkishness from the FOMC and ECB has investors concerned that rates will be higher for longer raising the odds for a hard landing.
Well, 2022 you’ve finally done it. If there was any doubt about how bad of a year it has been, today’s decline in the S&P 500 will move 2022 into the lead for the largest number of 1% declines to close out the trading week going back to 1952 when the NYSE started the current five-trading day workweek. Heading into today, there were 15 declines of at least 1% in the S&P 500 on the last trading day of the week which was tied with 1974 and 2008 and one ahead of 2000 for the most in a single year.
Despite the record number of 1%+ declines to close out the week, the S&P 500’s cumulative decline this year on the last trading day of the week has been a decline of less than 9%. The reason is that not only has this year seen the highest frequency of 1%+ declines to close out the week, but it also tied with 1999 for the highest number of 1%+ gains (14).
All in, including today, the S&P 500 has ended the week with a gain or loss of at least 1% 30 times this year, or 60% of the time! Talk about an emotional market. And there are still two Fridays left after today!
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Dec 15, 2022
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“I was now resolved to do everything in my power to defeat the system.” – Oskar Schindler
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Investors didn’t like what they heard from Powell yesterday, and after sleeping on it overnight, they like what they heard even less. Futures are sharply lower this morning, but it’s not all because of the Fed. Since the close yesterday, we’ve seen a number of other central bank rate decisions around the world, plus a big batch of bad data from China where retail sales, unemployment, industrial production, and property prices all came in weaker than expected. This morning in the US, we’ve also seen a bunch of data, and it has also generally been weaker. Retail Sales, Empire Manufacturing, and Philly Fed all came in weaker than expected, while initial jobless claims were stronger than expected, and continuing claims came in right in line with forecasts.
This morning’s negative tone in the futures is disheartening for investors as it looks like just another failed test of the 200-DMA and the downtrend line that has been in place since the start of the year. Only time will tell if that ends up being the case, but the fact that the Fed continues to push the hawkish narrative right into what is an increasingly large pile of recession signals doesn’t inspire a lot of confidence.
Looking at the chart of the S&P 500, one light of encouragement is the fact that while the S&P 500 completely reversed course and sold off following its two prior tests of the downtrend, in the current one, it has been hanging around right around those levels for a few weeks now. There’s a saying in technical analysis that the more support or resistance is tested, the weaker it becomes, so the fact that we’ve seen multiple tests of the current downtrend with increasing frequency in the last few weeks could be just what the market needs to get through that level. That’s the hope at least!
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Dec 14, 2022
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“Adventure is just bad planning.” – Roald Amundsen
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Welcome to the 8th and final FOMC policy announcement of the year. Maybe it’s just us, but we would have been fine with just one or two announcements this year and a whole lot fewer speeches. Markets are pricing in a near certainty of a 50 bps rate hike today bringing the Fed’s total interest rate increases for 2022 to 4.25 percentage points. While markets are pretty certain of what the Fed will do, the big question on everyone’s mind is what is Powell going to say.
Isn’t it ironic that in the age of maximum Fed transparency where Fed officials practically speak multiple times a day that investors really have no idea what kind of tone the Fed chair will take at his news conference today? Will he start off the disclaimer that the Fed is “strongly committed to bringing inflation back down to our 2 percent goal”? Hopefully, Powell got up on the right side of the bed this morning and traffic getting to K street wasn’t too bad.
Futures have been mixed all morning on what has been a quiet day for data. The only release on the calendar was Import and Export Prices. Import Prices fell more than expected (-0.6% vs -0.5%), and Export Prices fell less than expected (-0.3% vs -0.5%). At the end of the day, though, none of this matters. Whatever Powell says will dictate the tone of the day. Any hints of a pause or a lowering in the magnitude of rate hikes going forward will be what bulls need to keep the rally going.
Despite recent comments from FOMC officials looking to downplay the significance of inverted yield curves and their impact on the economy, market participants have been intently focused on both the quantity and persistency of inversion at various points on the US Treasury curve. One of the Fed’s preferred measures of the yield curve is the spread between the yields on the 10-year and 3-month US Treasuries. This morning, the 10y3m curve remains inverted by over 80 basis points (bps) which will mark the 15th straight trading day that the curve was inverted by 50 bps or more.
Going back to 1962, there have been four other periods where the 3m10y curve inverted by 50 bps or more for at least 15 straight trading days. Each of those prior streaks lasted much longer than the current streak, although, with the curve inverted by over 80 bps, this streak can also be expected to last much longer. In terms of where these streaks occurred in the business cycle, in each of the four periods, a recession followed within eight months.
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Dec 13, 2022
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“It’s a proprietary strategy. I can’t go into it in great detail.” – Bernie Madoff
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One day short of 14 years after Bernie Madoff surrendered to authorities for his Ponzi scheme, Bahamian authorities arrested Sam Bankman-Fried yesterday in connection with his massive fraud in the cryptocurrency markets. Now that he’s behind bars, we can only hope that the nonstop media tour he has been on will come to an end.
We’ve got two very important days ahead for the markets with today’s November CPI and tomorrow’s FOMC rate decision. Futures are sharply higher heading into this morning’s release after a strong day yesterday, but hopefully, the markets haven’t set the bar too high.
While there is optimism among investors that the worst of inflation is behind us, the sentiment from two sectors that stand to benefit the most from inflation – Energy and Materials – has been mixed. The charts below show the relative strength of the S&P 500 Energy (XLE) and Materials (XLB) sectors versus the S&P 500 over the last ten years (top chart) and just the last year (bottom two charts).
Starting with the long-term picture, after years of underperformance, both Energy and Materials made a trough relative to the S&P 500 in 2020. While they have both stopped the bleeding, the rebound in Energy has been much stronger than the improvement in Materials (which never underperformed as much in the first place).
Over the last year, both sectors have significantly outperformed the market. Starting with Materials, its outperformance peaked in the spring and then came crashing back down to earth in the summer. The sector started outperforming again this fall, but in recent weeks it has started to run out of steam again.
The Energy sector has seen a much steadier trend out of outperformance this year, and its relative strength actually peaked in early November. While the sector has been under pressure relative to the market for the last month now, its relative strength uptrend has remained intact.
In the case of both sectors, their relative strength in recent weeks hasn’t been nearly as strong and steady as it was in the first half of 2022, but they are also far from collapsing reflecting the fact that while inflation pressures have not been as intense as they were earlier in the year, they still haven’t gone away.
Our Morning Lineup keeps readers on top of earnings data, economic news, global headlines, and market internals. We’re biased (of course!), but we think it’s the best and most helpful pre-market report in existence!
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