CPI Is THE FOCAL POINT...And Should Set the Next Trend for Stocks and Bonds
This morning all eyes will be on the CPI number... The YOY is what the Fed will be focused on... The expectation is 8.8% with a range on the BB Survey of 8.1 to 8.9%... There are whisper numbers out there with a 9% handle and some yo yo put out a phony report yesterday on BLS stationary that said the number was 10.2%... That was quickly debunked as the charts and the numbers in the text did not match... But the WH has added fuel to the fire with their pronouncements of higher numbers. We think the WH is just trying to cover their behind on what is the expected number... Other numbers will play a role in what the Fed thinks, but the YOY is what Powell says drives inflation expectations...
Fed.. 75 is locked in and we do not see a number that will reduce that expectation unless there is a 7 handle, which is mathematically impossible given where oil was when it was measured, soaring food costs, and rent increases... While oil reversed nicely on recession fears, that will show up in the August print for July... Rent will remain sticky... So 75 for July and 50 for September... But a lot can happen between 7/27 and 9/21... And we will have Jackson Hole at the end of August.. But this Fed is not the only CB to be aggressive... Both New Zealand and South Korea raised rates 50 this morning and BOC is going to raise 75 today... The question that will be on investor's minds is if we get an even worse number today could the Fed raise 100... We doubt that...
Scenarios... We won't waste time... The number should come in 8.5 to 9%... The war is still between inflation and recession... The higher the number, the more the Fed wants to raise rates to fight it... The more the Fed wants to raise rates, the faster the market builds in a recession... The more the market builds in a recession the more rates rally (go lower in yield), which is what we have been seeing since Friday with the 10 year going from 3.10 to 2.96 right now. It had gotten to 2.90 yesterday but a lousy auction curtailed the rally... But if recession takes the lead after CPI today then 2.875 and 2.75 are in the cards...
Rates... 2 year range is 2.75-3.125... 10 year 2.71 to 3.20... 5 year about the same... 2/10 remains solidly inverted for now, but is very volatile.. And could be positive if the recession scenario gets another wave of legs... Fed speakers are light today and not sure what more they can say... Bullard and Waller will be up on Friday, as is Bostic... But all of these speakers have been actively out there giving their views, which is well built into the rates markets...
Equities... Tough call.. The ranges of 3800-4100 have been holding, but the 3800 could easily give way... More and more think equities have bottomed but are waiting for a capitulation... One thing we are not seeing is a move up in Vix to 35-40, which many are waiting for... That might be a long wait as Vix is based on option prices... Options prices are determined on the margin on what Hedge funds do to hedge their positions... But options are expensive and HF have liquidated many of their longs while some are very short... So the traditional Vix spike that many are waiting for may not happen... Meanwhile the traditional Fed model on EQUITIES is SHOWING A SCRAMING BUY... THAT IS EARNINGS YIELD VERSUS THE 10 YEAR... 5.95% VS 2.96 FOR 10 YEARS.. That is a 300 basis point difference... Do not go out and buy equities today based on that , but keep it in mind.
Economy... We still do not see a recession... Some say 30%, others 50% probability... Google announced a slowdown in hiring, as many others already have announced... The slowdown is real, but many parts of the economy are still red hot and stimulus is likely at some point as the WH gears up for 2024... So we will stick with our no recession call for now... But the odds will increase and the fears are valid.
Volatility.. To quote from a dealer " the ICE Bofa MOVE index, a gauge of costs for treasury options, rose in four of the last 5 weeks. The Vix for equities fell for three straight weeks.. The Moves's premium over the Vix has widened this month to the most since 2009"... Translated, this means that bonds are now more volatile than equities, which is where the fast money has moved to play..
Corporates issuance remains on life support... Only one deal got priced yesterday. The optics were awful... And will probably get worse before getting better... Order book was 1.6 oversubscribed and new issue concession landed at 28 basis... We talked with the NY Times yesterday about corporates, and our view is not good and something the Fed should be watching... But for now companies have good balance sheets, but watch the BBB space...
Fasten your seat belts.. The new trend starts at 8.30 am
