US Equity Futures Extend Monday Rally..Will Powell Take Away the Punch Bowl Wed?
Equities rallied 40 S+P points in yesterday's holiday session... And added another 30 this morning, with a top of about 70, now up 62... Treasuries are lower and steeper with 2/30 out 5 basis... Long Treasuries are catching up to what Europe did yesterday... There continues to be a lot of negativity in the global outlook with recession odds increasing and inflation remaining sticky... But there was more written this week that stocks are starting to look reasonable... The biggest bull seem to be Ron Baron of the Baron Funds, who said "this is a once in a generation buying opportunity as stocks tumble into a bear market"... Meanwhile Mike Wilson of MS is still bearish looking for 3000 -3400 on the S+P ... We are focused on the 3500 level...
Outlook... Economy... Are we in or going into a recession?... More and more think so... Both GS and Morgan Stanley increased their odds.. And the Fed itself said on Friday in their Liberty Street Outlook that the odds for a soft landing is only 10%... That is somewhat independent from what Fed Governors are saying... Of course all the politicians, which we now include former Fed Chair Yellen, are trying to talk down a recession....
The Fed... Powell testifies in front of the Senate tomorrow and the House on Thursday... We expect him to continue to take away the proverbial "punch bowl", meaning continued aggressive tightening... He said on Friday in some abbreviated remarks that the Fed's goal is still to bring inflation down to 2%... We ask in what world with everything changing, from Covid recovery, to supply chain issues, and the permanent change in consumer habits from working from home, why is it that the inflation goal does not change? What Capital Risk Analysis Principles are they using... ? We think that the Fed should change their outlook to be more realistic...
Housing... With mortgage rates doubling, with the biggest increase in Freddie rates in 35 years, housing is slowing down dramatically... Whether you look at last weeks housing starts, down 14.4% or today's existing home sales, expected to be down 3.7%, the outlook is much worse... Redfin, who along with Compass, laid off workers last week, showed that traffic at homes for sale have dropped and the share of homes with price drops reaches new highs... As our head Mortgage trade said recently, the most valuable asset in a home right now is the 3% mortgage, why would anyone put their home up for sale to go from a 3% to 6% mortgage?... While we could give reasons, that will add to the slowdown that will drag the economy lower... We still do not think recession but the odds are growing...
Inflation... Going to be sticky going forward... But one statistic that Morgan Stanley sent over the weekend shows that while supply chain issues are about the same, the demand side has been reduced by over 6%... This will continue to work towards lower inflation.
So what is the Fed going to do?.. Waller wants to go 75 next month... So does Bullard... But Waller said there was a window for the Fed to raise rates before the market dramatically slows... Waller also said there would be a time in the not too distant future, where the Fed would have to start to lower rates... So to get maximum optionality they should front load now...while we understand it, why is it they have to send the economy into or near a recession, when they know that most of the inflation is being caused by 2021 Fiscal stimulus and supply chain issues that are starting to subside?
60/40 Stocks to bonds has had its worst beginning of the year since 1976... With both stocks and bonds getting crushed, according to Bespoke, the YTD is down 17.6%. Ishares LQD, short corporates, is down 17% YTD. Wilshire 5000 estimates that over 12.5 trillion dollars has been lost on stocks year to date.. A huge number... The question now becomes what are rates going to do... David Levy, in Barron's, said that he thinks the high on rates for the year was last Tuesday, when 2 years hit 3.44 and 10 years 3.49... Both rallied into Friday's close 30 and 27 basis points ,respectively... We hope he is right, but if you believe 4-4.25% Fed Funds is coming, we have not seen the high yields in rates..
New issue corporates was shut out last week... We see a range of estimates this week from zero to 40 billion... Midpoint 19 billion... Oracle benchmark continues to be whispered about but it has been that way for a few weeks... Spreads are stable for the moment.
Hedge funds are short and levered on equities... So there is room for a rally... But again we think Powell will be negative until the mood in DC moves from fighting inflation to fighting unemployment... While Biden made some comment that in a talk with Larry Summers that Summers did not think the US was going into a recession, we saw an interview with Summers from London yesterday where he thinks the jobless rates needs to be 5% for 5 years... Which could mean 7.5% for a few years or as high as 10%... These sound like recession numbers to us...here is a paragraph
"We need five years of unemployment above 5% to contain inflation -- in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment," said Summers said in a speech in London Monday. "There are numbers that are remarkably discouraging relative to the Fed Reserve view."
