Morning Roundup

By Mark Masterson on October 1, 2024

Good morning,

Below are the news items moving markets today:

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Executive Summary:

Onward into October we march!

It’s crunch time now as we near the one month until election day.  No doubt this will be an interesting few months ahead.

For the first time in a week I don’t recall seeing news of new China stimulus last night.  Did you know that the Chinese markets are on holiday Tuesday October 1st through Monday October 7th, 2024?  Perhaps that explains some of the FOMO moves to get in ahead of the dead zone for Chinese markets.  More on China below in the charts.

September was very calm for markets – despite the historical data that volatility often returns in September/October – especially in election years.  In fact, the S&P 500 rose 2% in September, which marks first positive September since 2019.  I’m quite certain Yellen and Powell had a hand in ensuring calm and orderly markets ahead of the election.  (Fiscal spending and a rate cut don’t hurt)

For the remainder of the week, here is the U.S. economic data:

• ISM MANUFACTURING PMI (TUES.)

• JOLTS JOB OPENINGS (TUES.)

• ADP NONFARM PAYROLLS (WED.)

• JOBLESS CLAIMS (THURS.)

• ISM SERVICES PMI (THURS.)

• NONFARM PAYROLLS (FRI.)

• UNEMPLOYMENT RATE (FRI.)

• AVERAGE HOURLY EARNINGS (FRI.)

I would expect the jobs data to be market moving.

We also get a full calendar of Fed speakers this week – including Powell…..

• FOMC MEMBER BOSTIC (TUES. 11:00AM)

• FOMC MEMBER COOK (TUES. 11:10AM)

• FOMC MEMBER BARKIN (TUES. 6:15PM)

• FOMC MEMBER COLLINS (TUES. 6:15PM)

• FOMC MEMBER HAMMACK (WED. 9:00AM)

• FOMC MEMBER MUSALEM (WED. 10:05AM)

• FOMC MEMBER BOWMAN (WED. 11:00AM)

• FOMC MEMBER BOSTIC (THURS. 10:40AM)

• FOMC MEMBER WILLIAMS (FRI. 9:00AM)

Powell spoke yesterday.  He stayed down the middle in his comments……

• FED’S POWELL: THE US ECONOMY IS IN SOLID SHAPE; WE INTEND TO USE OUR TOOLS TO KEEP IT THERE.
• FED’S POWELL: POLICY WILL MOVE OVER TIME TOWARD MORE NEUTRAL STANCE IF ECONOMY EVOLVES BROADLY AS EXPECTED.
• FED’S POWELL: LABOR CONDITIONS ARE SOLID, LABOR MARKET ROUGHLY IN BALANCE.
• POWELL: WE DO NOT BELIEVE WE NEED TO SEE FURTHER LABOR MARKET COOLING TO ACHIEVE 2% INFLATION 
• FED’S POWELL: COLLEAGUES AND I HAVE GREATER CONFIDENCE INFLATION IS ON SUSTAINABLE PATH TO 2%.
• FED’S POWELL: DISINFLATION IS BROAD BASED, RECENT DATA INDICATE FURTHER PROGRESS TOWARD SUSTAINED RETURN TO 2%.
• FED’S POWELL: A 50 BPS RATE CUT REFLECTS GROWING CONFIDENCE THAT APPROPRIATE POLICY RECALIBRATION CAN MAINTAIN LABOR MARKET STRENGTH AND INFLATION MOVING TOWARD GOAL.
• FED’S POWELL: WE HAVE MADE GOOD PROGRESS TOWARD RESTORING PRICE STABILITY WITHOUT PAINFUL RISE IN UNEMPLOYMENT.
• FED’S POWELL: RISKS ARE TWO-SIDED, DECISIONS WILL BE MEETING-BY-MEETING.
• FED’S POWELL: THERE’S NOTHING SUGGESTING A DOWNTURN IS MORE LIKELY NOW.

The one quote that was interesting and a bit contrary to the other Fed speakers was this one below……

• POWELL: FED DOESN’T FEEL LIKE IT’S IN A HURRY TO CUT QUICKLY

Back to the market…..

The S&P is having a solid year.  October is often choppy with a median performance of -2% (1987 is the obvious outlier, so we used median vs. average). 

The internals today are good heading into the election.  As the 4^th quarter begins, over 80% of S&P issues are above the 200-day moving average (one of the stronger readings of the year). 

Sentiment is also quite bullish.  Perhaps overly so.  The CNN Fear and Greed Index (been around a while) starts the quarter in the extreme greed zone….

CNN.com 10 1 24

Investors are quote complacent ahead of the election.

• ‘60% said they expect US equities will deliver the best returns in the fourth quarter. And as they ramp up these bets, they’re avoiding traditional ports of calm, such as Treasuries, the dollar and gold.’
•  https://bloomberg.com/news/articles/2024-09-29/stocks-are-in-and-bonds-are-out-top-trades-for-the-rest-of-the-year?utm_source=twitter&utm_medium=social&utm_campaign=socialflow-organic&utm_content=business&cmpid=socialflow-twitter-business

Jesse Felder 10 1 24

And – what to avoid……Oil.  I get it if the economy is ready to roll over.  However, there are some pretty notable geopolitical hot zones that can impact energy, and inflation may be a risk to move higher after the China stimulus and Fed rate cuts…..

• ‘When asked which trade is best to avoid for the rest of the year, 36% — the biggest group — cited buying oil.’
• https://bloomberg.com/news/articles/2024-09-29/stocks-are-in-and-bonds-are-out-top-trades-for-the-rest-of-the-year?utm_source=twitter&utm_medium=social&utm_campaign=socialflow-organic&utm_content=business&cmpid=socialflow-twitter-business
•  

A potential inflation spark may be upon us with the port strikes…..

• Strikes begin at East Coast ports; analysts see disruption potential even from short walkout
• As expected, ~45K dockworkers operating 36 East- and Gulf Coast ports went on strike overnight, largest such walkout since 1977 (NY Times).
• Wages, protection against automation among the main sticking points. Unclear how long strike may last, with analysts discussing durations of a few days to a few weeks.
• White House can impose an 80-day cooling-off period; Biden has expressed reluctance about this but administration has been active in encouraging negotiation (Reuters, Axios).
• However, disruptions and economic impacts could be significant even with a short strike. JP Morgan estimates economic costs at $3.8-4.5B per day (Bloomberg), noting strike may primarily impact container and auto trade with relatively less impact on bulk agricultural/commodities products.
• Barclays estimates 60-70% of some major retail categories flow through impacted ports, though adds there was some pull-forward of imports this year. Jefferies last week observed a 10-day port strike in 2002 cost $600M-$2B per day, equal to 0.05-0.2% of GDP.

More below……

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Articles of Interest:

• Middle East tensions:
  • Israeli launches limited ground invasion of southern Lebanon (FT, Axios , Bloomberg, Reuters)
• Central banks:
  • Fed Chair Powell sees no hurry to cut rates, flags two more 25 bp reductions in 2024 if economy evolves as expected (FT , Reuters)
  • Developed market central banks to push on with rate cuts over remainder of 2024, but 2025 outlook uncertain (Bloomberg)
• US economy:
  • US businesses warn of port strikes; transportation, warehousing set to be first sectors to feel the pinch (FT , NY Times)
  • Maritime Alliance offers almost 50% hike in wages for dockworkers in bid to avoid East Coast strike (Bloomberg, NY Times, Reuters)
  • Morgan Stanley says Trump’s proposed tariffs could reduce monthly payrolls by 50-70K, stoke inflation and drag on GDP growth (Bloomberg)
  • US shoppers expected to boost holiday spending by 7%, though companies expected to have to step up strategic pricing and promotion (Bloomberg)
• China:
  • China’s housing glut collides with decline in population with many cities stuck with empty homes they may never fill (link )
  • Private data showed China new home sales contracted at a steeper pace last month (Bloomberg)
  • Beijing joins other tier-one cities in China to ease homebuying restrictions (NY Times )
• Markets:
  • China equity rally a non-factor for US traders focused on Fed, US growth trajectory and labor market (Bloomberg)
  • Traders opt for complex derivative bets instead of predicting who will win US election, seeking to profit from the uncertainty (FT )
  • Stock market rally forces margin calls on China quant hedge funds that were short (Bloomberg)
  • Global funds preparing to bet on China again after government steps up efforts to stabilize growth, revive market sentiment (Reuters)
• Geopolitics:
  • Libya’s eastern parliament on Monday agreed to appoint Naji Mohamed Issa Belqasem as central bank governor (AP)
  • Analysts expect limited market impact following Japan’s incoming PM Ishiba’s election (Nikkei)

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Charts of the day:

Some more facts on China……

We are now seeing China’s central bank doing QE….

• The Chinese central bank said today that in September, it bought $28.52 billion of the country’s government bonds in open-market operations.

Hedge funds loaded up after the China news.

It was the largest one week net flows in a decade

Just before the markets over there go on holiday. Sounds like some FOMO!

Chart: Goldman Sachs 10 1 24

This led to the Shanghai Composite having its  best rolling 5-day return since (at least) 1996.

Deutch Bank 10 1 24

Rallies in China are often strong…..

• The average MSCI China rally is roughly +78% over 176 trading days.

They are also very volatile….

• Volatility is intense though with the index producing an average intra-year correction of -30% and just a +1% annualized return since the end of 1992

JPMORGAN, on China stimulus:  “.. I don’t think it’s an exaggeration to say that China is acting somewhat out of desperation given the severity of the declines shown in the charts below.” [Cembalest]

Money supply has fallen off a cliff in China…..

JP Morgan 10 1 24

Commercial real estate in China has collapsed…..

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Quote of the day:

“Doctors tell me I have the body of a thirty-year-old. I know I have the brain of a fifteen-year-old. If you’ve got both, you can play baseball.”

– Pete Rose