Morning Roundup

By Mark Masterson on December 4, 2023

Good morning,

Below are the news items moving markets today:

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Executive Summary:

Capital markets look to take a breather after another strong week of rally across most sectors and assets.

Again – when the dollar and yields move lower, it’s a tailwind to most assets.

As you can see in the chart below – both the dollar and yields have been falling since late October……yields in yellow and dollar in blue.

Bianco Research 12 2 23

The rally in November was powerful.  It essentially retraced the entire decline from July-October. 

The question is – now what?

We knew there would be a year end bounce based on seasonal patterns.  Has the rally in November captured most of that bounce?  Hard to say.  Yet – if you look at sentiment below in the charts section it certainly looks like that is a possibility.

The key is the Fed. 

Markets are now pricing in 1.25% of rate cuts next year.  This is happening at the same time as Powell saying “higher for longer.”  So, the market is calling Powell’s bluff – or – the Fed has lost all credibility.

Here is what Powell said on Friday…..

• In remarks before a ‘fireside chat’ at Spelman College today, Fed Chair Powell also said there is no clarity yet on when the Fed might ease, and stressed that the Fed is prepared to tighten further should it become appropriate.
• He reiterated that the Fed makes decisions meeting by meeting based on the totality of the data.
• Powell said premature to determine with confidence Fed has achieved a significantly restrictive stance, or to speculate on when policy might ease.
• Added Fed prepared to tighten further if appropriate.
• However, also said Fed has moved policy well into restrictive territory, allowing it to put downward pressure on economic activity and inflation.
• Added that given policy is believed to work with a lag, full effects of tightening have yet to be felt.
• Seemingly most important, Powell did not explicitly push back against comments earlier last week from Fed Governor Waller, who said continued disinflation over next several months could lead to rate cuts. This plays into the view of some economists, including those at UBS, that higher-for-longer and restrictive-for-longer are very different concepts. Powell also did not push back on the ~100 bp of FCI easing seen over the last month or so.
• StreetAccount notes that much of the week’s Fed narrative has been focused on dovish comments from Fed Governor Waller on Monday, who said that there is no reason to keep rates “really high” if inflation begins to come down. This has played into thoughts about a possible policy pivot, with Fedwatch showing market expectations for a rate cut as early as the March 2024 FOMC meeting.

Yet – this is the street narrative…..

• With inflation rates tracking towards central bank targets, debate increasingly shifting towards timing and extent of next year’s dovish pivot (FT, Bloomberg).
• Futures pricing in at least 125 bp of Fed rate cuts in 2024 and in Europe investors betting ECB will be cutting rates in H1 2024, reflecting expectation slower growth and sufficient progress on inflation will enable a dovish policy shift.
• Disconnect between dovish market rate outlook and policymaker caution continues to drive some concern that rate cut expectations have moved too far ahead of central bank signaling.
• However, there have also been subtle shifts in central bank messaging with Fed Governor Waller acknowledging possibility of rate cuts and Chair Powell not explicitly pushing back. Similar debate playing out among ECB and UK policymakers.

The November rally sparked the biggest monthly loosening of financial conditions on record.  Wow.

As Jim Bianco said…..”I assumed the Goldman Financial Condition Index was merely an index level.  I just learned the index is actually the equivalent of fed funds basis points (bps).So, November’s record easing of financial conditions was the equivalent of 90 bps of Fed cuts.

Or rounding it works out to the financial market’s November rally doing “the work of the Fed” to the tune of four 25 bps cuts in the month of November.

Bianco Research 12 2 23

Here is what is on tap this week for economic data:

*FACTORY ORDERS (MON.)

*ISM SERVICES PMI (TUES.)

*JOLTS JOB OPENINGS (TUES.)

*ADP NONFARM PAYROLLS (WED.)

*JOBLESS CLAIMS (THURS.)

*NONFARM PAYROLLS (FRI.)

*UNEMPLOYMENT RATE (FRI.)

*AVERAGE HOURLY EARNINGS (FRI.)

*CONSUMER SENTIMENT (FRI.)

Its notable that the Fed’s estimate of economic growth is moving down – and now barely at 1%….

Atlanta Fed 12 2 23

Its also notable that so much of GDP is driven by expanding debt levels – and not just here in the US – buy globally.

Take a look…..It shows that GDP is artificially inflated as it’s driven by debt.

h/t

@DanielKral1

Sven Henrich 12 1 23

Interesting quote from Charlie Munger who passed last week.    RIP

‘I am so afraid of a democracy getting the idea that you can just print money to solve all problems. In the end, if you end up printing too much, you end up like Venezuela.’ -Charlie Munger

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Articles of Interest:

Weekend/Monday Headlines:

• Economy:
  • As customers push back against higher prices, outsized corporate profits may wane as an inflation driver (link)
  • Supply chain normalization, Fed rate hikes helping to drive goods deflation (link)
  • Corporate profit recovery a key factor in helping US economy avoid recession (link)
  • Nonfarm payrolls expected to increase 180K in November after 150K advance in October, helped by return of striking UAW workers (Bloomberg)
• Markets:
  • Despite already attracting over $1T in 2023, influx of cash to money market funds expected to continue next year (FT)
  • Retail investors driving big gains in meme stocks and other risky plays, but also raising concerns rally may be overdone (Bloomberg)
  • Seasonality a tailwind for stocks in December though plenty of names could see pressure early in month from tax-loss selling (Reuters)
  • Uber, Jabil and Builders FirstSource all tapped to join S&P 500 (link)
  • Bearish bets on 10-year Treasury futures highest since mid-October (Reuters)
• Geopolitics:
  • US warship, multiple commercial ships in Red Sea targeted by missiles from Houthi-controlled Yemen (ABC News)
  • Israel steps up military pressure in Gaza in push to get Hamas to make a deal on further exchanges of prisoners and hostages (Reuters)

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Charts of the day:

The rally in stocks has done to sentiment what it always does…..

It has now pushed the dumb money into “extreme optimism”.  (red line)

The smart money is now pushing into extreme pessimism…

Note on the chart – the black line is the S&P 500.  When dumb money gets this bullish – it tends to be a pause or pullback moment for markets….

Sentimenttrader.com 12 4 23

Take a look at another sentiment measure I track – the AAII readings.

Retail is the most bullish that they’ve been since April of 2021, according to @AAIISentiment

Markets and Mayhem 12 4 23

The bulls are highest in years, and the bears are extinct…..AAII bulls vs bears shows retail bears retreated by the most since April of 2009!

Markets and Mayhem 12 4 23

Another look at them together…..

There are fewer bears now than at any point in the last 2 years.

Macromicro 12 1 23

Trend following CTAs are now max long – almost off the chart….

Max long equities in CTA land

Hayekandkeyens 12 4 23

The Barrons cover strikes again….

We’ll see how this one works out – but it does tend to mark a turning point.  This one is about AI as a new gold rush….

Barrons.com 12 4 23

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Quote of the day:

“The rich invest in time, the poor invest in money.”

— Warren Buffett