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“If you are patient…and wait long enough…Nothing will happen” – Jim Davis
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Markets are looking mixed as we head into the opening bell this morning. S&P 500 futures are indicated slightly higher while the Nasdaq is poised to open down nearly 1% as tech stocks continue to get slammed. The weakness in tech comes despite treasury yields and crude oil both trading lower while gold and crypto also show weakness.
The global tech sell-off continued in Asia overnight, with markets in the region seeing sharp declines. Japan fell 4%, while South Korea’s KOSPI plunged over 10% for its worst day since March as the index has now lost over a third of its value. We just posted something on the website looking at the recent plunge in the KOSPI from the perspective of prior bear markets. You can see it here.
In Europe, we’re seeing a much more muted start to the session. The STOXX 600 is up 0.1%, and the only major index up or down more than 0.5% is the FTSE-100 (+0.6%). In France, July Consumer Confidence came in slightly better than expected, while Retail Sales ticked up 0.5% versus May’s growth rate of 1.3%.
In the US today, aside from the deluge of earnings this morning and after the close, the only economic reports to speak of are the FHFA House Price Indices at 9 AM and Consumer Confidence at 10 AM.
We’re less than 30 hours away from the Fed’s latest decision on interest rates, and when it comes to market expectations for what the FOMC will do, the level of uncertainty is extremely elevated. Over on the CME Fed Watch tool, the futures market is pricing in greater than 35% odds of a 25-bps hike.
In the betting markets, odds of a hike aren’t that elevated, but even here, gamblers expect 26% odds of a hike tomorrow. On both Fed Watch and Kalshi, these levels of uncertainty just one day ahead of a hike are extremely rare. The Fed has gone out of its way over the last several years and done its best to make the results of the meeting as unsurprising as possible, but the Warsh Fed is taking a new path.
The last Fed meeting was in mid-June, and if the Fed chose to keep rates unchanged at that meeting, it’s hard to look at anything in the markets over the last six weeks that would justify hiking now. Take the price of crude oil. In the month leading up to that meeting, the average price of WTI was $90.43 per barrel. Since that meeting, the price of crude oil has closed above $90 just once, and the average price has been $76.42 per barrel, or 15% less.
More recently, we’ve increasingly heard about how the rebound in oil prices off the early July lows is justification for a rate hike, as inflation is sure to accelerate again in July. But here the math doesn’t quite add up. The chart below shows the average price of WTI over the last 12 months. Through yesterday’s close, the average price of WTI in July has been $78.37, which is 4% down from the average price of $81.79 in June. As we type this, crude oil is trading above the July average, but at $81.33 is still below the June average price.
Prices at the pump have followed a similar path. The $3.95 average price of a gallon of gas this month would mark the first monthly average below $4 since March and is 2.5% lower than the average price in June. In terms of both crude oil and prices at the pump, their impact on July CPI looks more likely to add downside pressure than an upside lift.
This all gets settled tomorrow afternoon, but the evidence points to little justification for a hike, and a decision to do so would raise more questions about the Fed’s intentions than it would answer.
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