CPI Is Number One Focal Point This Week....Everything Else is Noise
We expect Wednesday's CPI print, good or bad, to be the focal point of the next move in rates and equities... If the print is "BAD", defined as anywhere near the expectation of 8.8% or possibly a 9% handle, then 75 rate increase for July is a done deal... And some talk of 100 could surface... If the number is closer to the low end of estimates, then 75 becomes less certain...
Overnight equities started flat and then went south into the European cross as Chinese stocks got hit on more Covid fallout, as well as fines against Tech companies... Hong Kong was down near 3% and CSI 300 down 1.67%...Chinese stocks had their worst day in about a month. A colleague sent a story that bank depositors got arrested for trying to get their money back... Baba and Tencent were down as is the KWEB ETF. US S+P futures hare rebounded about half of their losses since 2 am... The volatility of equities is such that we could have a positive day... The jury is still out as BB points out the likes of Wilson of Morgan Stanley is still negative while Citi is positive on the outlook of equities for the rest of the year...
The economy continues to plug along with the war between inflation and recession ongoing... Friday was a clear indicator that the employment picture in the US is no where near recession... And that the economy is showing strength... Or is that really the case? Jan Hatzius sent out a report to us and others early this morning questioning the strength of the report when compared to the Household Survey, which was almost as negative as the nonfarm number was positive.. Hatzius says "
"Fears of an imminent US recession have abated somewhat after the 372k nonfarm payroll gain reported for June. But there is no doubt that a labor market slowdown is underway. Job openings and quits are declining, jobless claims are rising, the ISM employment indices in manufacturing and services have fallen to contractionary levels, and many publicly traded companies have announced hiring freezes or slowdowns. Perhaps most tellingly, the household survey of employment has shown essentially no job gains for the past three months, both on a headline basis and when adjusted to the definitions of the establishment survey. While the household survey is much noisier than the establishment survey on a month-to-month basis, it picks up changes in net new firm creation in real time and therefore often outperforms the establishment survey at cyclical turning points, provided both measures are averaged over several months. This suggests that the still-robust nonfarm payroll prints of recent months probably overstate true job growth."
Sorry for quoting someone else's work but above is a good summary of the skepticism of Friday's number...Meanwhile Larry Summers said on WSW, that the US could still see a recession over the next 18 months, but the latest numbers have diminished his view that a recession has already begun.... So that brings back the question as to whether two negative GDP prints for the first two quarters of the year indicate a recession.. THE ANSWER IS CLEARLY NO.. The NBER looks at multiple numbers to determine whether there is a recession, including the GDI (gross domestic income), which is very positive... And something that both Waller and Bullard talking about last week... The current environment does not meet the criteria of a recession...
Oil...crazy ….Listened to a few podcasts from Macrovoices... One bearish on equities and one bullish... But that is not what we want to discuss... The hosts of this podcast are oil and gold people... And while they continue to be wrong on gold, we listen to their view on oil... They claim there are severe shortages in oil throughout the world... That Cushing storage is very low... And whoever is advising Biden on the Strategic oil reserve is giving him bad advice. The SPR is now down to 1986 levels as more barrels are being sold... Unfortunately there is no excess refining capacityin the US to refine the oil so the excess is being sold... That oil is heading to China, as to what they and others are saying... That is very bad optics, reducing our Strategic Reserve, when futures spreads show shortages, and Russia has the ability to squeeze the markets next winter when Europe really needs energy... And we know Putin is thinking just that... Not a good scenario... While the likes of Citi still see the potential of oil heading to 65 via a slowdown in the US, the JPM 380 number of last week still is in the back of our mind.
The jury is out on recession... Mastercard was out with numbers showing that consumers have not slowed their spending..June overall spending was up YOY of 9.5%..Airline was up 18.2% and lodging up 33.7%...Meanwhile Barron's had a great article on Car Repo... And how many cars are starting to be repossessed and that the used car numbers valuation are dropping...In June, used car prices were at 43%, or $10,046 ,above projected normal rates, according to Car Pilot... Might want to wait to buy that new or used car.
Fed...what is built in.. For now we are back to 75 for July and 50 for September...terminal rates for Q1 2023 have risen to 3.60, well off Wednesday lows of 3.15.. So up 45 from the lows...we have Barkin, Waller, Bostic, and Bullard out this week... The last three spoke last week and all were clear that 75 was there number... The Fed goes into the Black out period at Friday's close... But that does not mean the Fed won't make a call to our friends at the WSJ or FT... If they want to get a message across so beware...
Rates...liquidity is awful... But for ranges in the short term, it seems like 3.125 is good support for 2's and 10's... 3.10 was the high yield on Friday for 10 years... Next level of resistance is back to 3%...Curve is steepening today as the recession argument is getting some legs... 2/10 are slightly inverted with 5/30 are positive 14... But we read some interesting statistics and outlook on liquidity in the treasury market... First the size of the market has increased from 16 trillion to 23 trillion... And the move index of volatility is starting to look like the chart from 2020. According to Brokertec, the market depth on treasuries, measured by the total number of bids and offers, has been falling dramatically... Historically the depth averaged 150 million to 200 million over the past decade. That now is around 40-50 million now...yikes... In the past month 10 year daily moves have topped 15 basis points 10 times.
Cynical...we do not comment on stocks deals or individual stocks...period... But our old colleague, call him Mr. Rogers, reached out this weekend to say that Musk used the twitter distraction to sell Tesla stocks... Interesting... When the deal was announced the stock was 998, today it is 758 after bottoming at 628 on May 24... Maybe he is on to something...
Expect a very volatile, vacation liquidity, week with CPI the next trend to follow.
