Morning Roundup

By Mark Masterson on July 31, 2023

Good morning,

Below are the news items moving markets today:

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Executive Summary:

Happy Monday!

After a solid post-Fed up week last week, capital markets look to end the month of July on a positive note.

As always – here is the economic data on tap this week…..

• *ISM MANUFACTURING PMI (TUES.)
• *JOLTS (TUES.)
• *ADP PAYROLLS (WED.)
• *JOBLESS CLAIMS (THURS.)
• *ISM SERVICES PMI (THURS.)
• *NONFARM PAYROLLS (FRI.)
• *UNEMPLOYMENT RATE (FRI.)

About the data, and the inverted yield curve.  Several clients have asked recently about the potential for recession, and more important – the timing of the potential recession.

Below is a great article from David Rosenberg highlighting the history and facts around timing…..

• It’s All About the Lags (linkedin.com)

Rosenberg in his research studies the “long and variable” lags from Fed tightening to economic slowdown.  One chart jumped out to me…..

From Dave Rosenberg…  “The fact that Fed-induced curve inversions have presaged recessions 100% of the time in the past is never respected. Always a case of hope triumphing over experience. Thing is — very rarely do recessions occur in the same month as the onset of the inverted yield curve. There are lags, and that typically can be a year or longer. Think back to 2007. But like the story of the boy who cried wolf, the wolf did show up in the end.”

The below charts shows the time it takes for a recession to show up from the time the yield curve typically inverts.

You can see it is quite a range.  From 0 months to 19 months.  The average is 10 months.  We are already past that 10 month mark on the current inverstion.

David Rosenberg 7 28 23

By my estimation, the yield curve first inverted last June of 2022.  So we are now 12 months into the inversion….

In my opinion, the depth of this inversion will prove to be meaningful.  This one is deep.

Its interesting that the Fed is acting like it is draining liquidity – but in fact the liquidity is leaking into the stock market once again…..

Since the Fed began the emergency loan program to the banks in March – the S&P 500 has risen relentlessly.  Stocks just chasing/following the liquidity….

This stock rally started the day Silicon Valley Bank failed…..

Northmantrader.com 7 28 23

Proof the Fed balance sheet reduction (QT) is happening very, very slowly…….

The Fed has reduced its balance sheet by a mere 8% from the peak.

This is after the balance sheet doubled in a very short time post-covid.

So up 100% in months, and then down 8% over an entire year.

Fred.com 7 31 23

In one of the more interesting charts from the weekend….

Do you think it may be time for a “youth movement” in Congress?

The below chart is not a meme or tech stock…..  It is members of Congress over the age of 70

@alifarhat79 7 29 23

More charts below

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Articles of Interest:

• Central banks:
  • BOJ announced surprise bond-purchase operation to tamp down rates after last week’s adjustment to YCC (Reuters)
  • ECB’s Lagarde flags possible September rate hike even after a pause (Bloomberg, FT)
• Market:
  • BOJ signals end of YCC, sparking big spike in volatility in Japanese markets as investors digest landmark shift (FT)
  • Morgan Stanley’s Wilson says Fed policy, late-cycle rally, not earnings, driving US equities higher (Bloomberg)
  • Confidence in a soft landing has underpinned S&P strength, with traders increasingly turning their backs on downside protection (Bloomberg)
  • Dollar weakness as Fed nears rate peak could help earnings growth for US multinationals (Bloomberg)
  • Coming government Treasury sales, BoJ’s YCC tweaks tamping down optimism for a bond-market rally (Bloomberg)
• Economy:
  • Excess savings built up during pandemic dwindle as inflation and interest rates rise (Reuters)
  • Lower debt, greater reliance on fixed rates has made US economy more resilient in the face of rate hikes (Axios)
  • Poll finds most characterize economy as “struggling” or “uncertain” (CBS News)
  • Developers providing an increasing supply of apartments, but these are largely clustered in a few high-growth areas (AP)

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Charts of the day:

A few interesting charts from my weekend review…..

The dollar broke down, and then rallied back into the channel post-Fed meeting, and more importantly the ECB meeting.  Remember Euro strength = dollar weakness, but Euro weakness pushes the dollar higher.  The Euro fell last week.

It certainly is working hard to avoid the breakdown thus far.

A weaker dollar will push up inflation via the rise of commodity prices.

Weekly chart of gold finally reached oversold…. (green boxes)

These weekly oversold levels have often marked levels where gold started a bounce/rise.

The chart showing gold to stocks is also lingering at an important level – the lower line of this channel.

Will it start a rise? (gold outperforming stocks) – or will it break down as stocks continue to outperform gold?

We’ll watch like you and see.

Sentiment check…

Strategas looks at 7 different sentiment indicators.

The red dot on the left is where they started the year, and the blue line is where it is today.

Most are running pretty hot – which we have pointed out to you over the past few weeks.  Extremes typically need some time to reset.

Strategas 7 28 23

Traders appear “all in” when you look at the 3 month stock ETF flows…..

According to Macro Charts we are in the “Max FOMO” phase….

Macro Charts 7 31 23

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Quote of the day:

Being poor is not having too little, it is wanting more.”

— Seneca