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'Positive' jobless claims data (which simply unwound last week's farce in MA) and 'not pretty' existing home sales data were dominated today by some notably more-hawkish-than-recent-norms FedSpeak to start the day:

Dallas Fed's Logan: "The data in coming weeks could yet show that it is appropriate to skip a meeting..."

"As of today, though, we aren’t there yet... We haven't yet made the progress we need to make. And it's a long way from here to 2% inflation."

Fed Gov Jefferson: "Inflation is too high, and we have not yet made sufficient progress on reducing it," he said.

"Outside of energy and food, the progress on inflation remains a challenge... a year is not a long enough period for demand to feel the full effect of higher interest rates."

St.Louis Fed's Bullard warned that "it may warrant taking out some insurance by raising rates somewhat more to make sure that we really do get inflation under control..."

"Our main risk is that inflation doesn’t go down or even turns around and goes higher, as it did in the 1970s."

So, a pause at best, more hikes possible, no signs of cuts at all, and the curve is adjusting that way...

Source: Bloomberg

Rate-change expectations continued to trend hawkishly higher (removing more cut expectations)...

Source: Bloomberg

Overall, Treasury yields soared higher with the short-end monkeyhammered (2Y +12bps, 30Y +5bps)...

Source: Bloomberg

And the yield curve flattened (inverted) further, shouting recession...

Source: Bloomberg

In fact, as Goldman notes, the 2y and 3y segments of the money market curves price substantially higher probability of recession compared to all four cycles since 1990...

...and then the rate-cuts?

Tech stocks saw more panic/safe-haven/momo/AI-fomo flows today with Nasdaq handily outperforming while The Dow and Small Caps underperformed and the S&P danced in the middle. The last two hours saw everything melt-up...

NVDA continued its melt up (another upgrade), rallying 5% today (AI God mode)...

As we reflected earlier, for NVDA to grow into its market cap, not only does AI have to put everyone out of work by 2030 but humans will be daytrading in zoos entertaining the algos...

NFLX also surged after reports that its ad-supported subs had hit 5 million...

Regional bank stocks bobbed and weaved between gains and losses...

The Dow is unch YTD, Nasdaq is not...

Source: Bloomberg

After all that, The Nasdaq is outperforming The Dow by an entire bull market...

The Nasdaq is outperforming the Dow this year by an entire bull market. pic.twitter.com/EdrKat1Urr

— Bespoke (@bespokeinvest) May 18, 2023

Tech valuations are at extreme levels relative to the broad market now...

Source: Bloomberg

The equal-weighted S&P is unchanged YTD...

Source: Bloomberg

The dollar continued to rise tick for tick with the Sept Fed rate expectation (implying only marginal gains from here for the dollar)...

Source: Bloomberg

Bitcoin was rug-pulled again at $27,000...

Source: Bloomberg

Gold extended its losses after breaking $2000

Oil prices dipped lower again today with WTI back at a $71 handle

Finally, Goldman points out The Confusing Triangle: the dollar, tech stocks and real rates into a recession.

The dollar rallies (fact) on higher real rates (check) OR rising risk aversion (not present), tech rallies (fact) on lower real rates (not present) OR higher risk appetite due to US exceptionalism (check).

Source: Bloomberg

One of these would be wrong if real rates and US exceptionalism are equally weighted but it is hard to say which one as both are expensive and due for a meaningful correction given the probability of recession.

Goldman suggests that given that equities are at odds with oil in terms of pricing the probability of an adverse growth outcome, we would think that in the past week or so the dollar is right and equities aren't.

China wasn't pretty overnight, and then domestically, ugly jobless claims and cooler than expected producer price inflation offered some dovish hope (inflation weaker and growth weaker = less need for Fed tightening) but PacWest pissed in the punchbowl by admitting that 10% of their deposits left the building last week following the FRC take-down and the news about them seeking strategic options.

And regional banks are a wreck...

The latter news dominated the former (which should also have been dovish - increasing the odds of the 'emergency' cut scenario priced into Fed Funds) but it smashed stocks and bond yields lower (but the dollar higher? which hammered gold).

So dovish, dovish, and dovish... and rate-CUT odds are soaring...

Meanwhile, the debt-ceiling overhang remains with the front-end of the Bill curve utterly insanely dislocated...

Never mind all that... Nasdaq clung on to gains on the day as The Dow and Small Caps lagged...

Alphabet dragged the tech indices higher...

The Mouse-House was a bloodbath...

Before we leave equity land, VVIX is decoupling (to the upside) vs VIX and that didn't end well the last two times...

Source: Bloomberg

Treasury yields were all lower on the day with the long-end outperforming on the day (2Y -1bps, 30Y -6bps). Yields are all lower on the week with the belly outperforming...

Source: Bloomberg

Despite the dovish headlines, the dollar rallied to one-week highs...

Source: Bloomberg

The South African Rand plunged to record lows after the US accused them of selling weapons to Russia...

Source: Bloomberg

Bitcoin was dumped lower again, falling back below $27,000...

Source: Bloomberg

Gold spiked early then was puked again...because nothing says dump gold like a debt ceiling crisis, banking crisis, and dovish implications for The Fed...

Oil slipped again as China rebound and US jobs data dented demand hopes, sending WTI back to a $70 handle...

Finally, 2023 is starting to look a lot like 2011... can they hold out til August for the X-Date hammer to hit?

For the S&P...

Source: Bloomberg

And VIX...

Source: Bloomberg

And judging by USA CDS, it's different (and worse) this time...

Source: Bloomberg

But hey, keep buying that dip!

By Michael Every of Rabobank

None so blind as those that will not see

There are none so blind as those who will not see: except those who see things that aren’t there because it also suits their book.

"Deflation and Fed rate cuts!" scream the markets selling us ‘transitory’ for two years. Yet US CPI, 0.4% m-o-m headline and core as expected, and 4.9% y-o-y headline, a rounding-error tick lower than consensus, and 5.5% core saw no evidence of that if you dug in rather than stripping whichever elements of high inflation you don’t like this month out. Durable and non-durable goods have stopped deflating on a GDP-style 3-month/3-month annualized basis, which means CPI needs to be led lower by services, which are not doing so ex-housing.

Imagine if agri analysts, instead of making careful, honest forecasts based on the complex factors impacting on supply and demand --and the realpolitik of what producers and consumers are both willing to hear-- made deliberately ridiculous forecasts just to push prices higher, so they would get paid more. That’s not how it works there, of course. But it is sadly how naïve economists with mean reverting models combine with shillltastic ‘Dow 36,000!’ types and 0DTE options nowadays.

At least the Wall Street Journal is honest enough to note: ‘We Might be Getting Used to High Inflation, and That’s Bad News: Companies’ ease with raising prices may mean more rapid increases are becoming entrenched’, while the ECB is muttering that it might need to keep hiking rates as far out as September. However, that still leads the same crowd to say the same things. For stocks, it means higher profits, and if rates go up, they have to come down again - because markets. For bonds, higher rates to fight inflation now means lower rates soon and lower long yields now - because markets.

Neither sees the bigger political-economy picture of why firms are able to raise prices, which speaks to a concentrated corporate power that can shrug off monetary policy. Nor are they seeing the inflationary geopolitical-economy backdrop inherent in:

• The Lowy Institute saying what we said years go: ‘Biden’s quiet economic revolution: The guiding hand of the state is back as geopolitics rules’;

• Politico noting ‘Reform or die? If the US gets its way, the WTO might do both’, putting a nail in the coffin of free-trade’s landmark institutional achievement in Trumpian fashion.

• The Wall Street Journal saying ‘Automation Giant Faces US Government Probe Over China Operations: Investigation of Rockwell looks at whether its software might allow access to critical US government and industrial infrastructure’ – spelling more decoupling;

• The Chinese defence minister refusing to meet his US counterpart due to US sanctions;

• US President Biden will sign a defence treaty with Papua New Guinea in person, which had been leaning towards China, in the first ever US presidential visit there;

• China’s official foreign affairs spokesman tweeting: “Pentagon has reportedly made plans for hitting opponents with genetically engineered weapons. The genomic data of Asian Chinese, European Aryans and Middle Eastern Arabs all on a list to be collected by the US military”(!)- while also underlining anger over US engagement with Taiwan;

• Beijing snubbing the German Finance minister, who responds, “We will not let our liberal values be bought for good business deals," as there is a public pushback at the VW shareholder meeting over its China operations; and

• Dollar-less Pakistan says it wants to pay for Russian oil in CNY.

And that’s just one day in 2023 – NONE OF WHICH IS BEING REFLECTED IN MARKET FORECASTS ABOUT WHAT THE FUTURE LOOKS LIKE. All they think about is when inflation comes down enough for the Fed to cut rates, because some people make more money that way, or sleep better, or both.

At the same time, those long only and forced to be long China by MSCI allocations, and Wall Street firms keen to growth their businesses there until the crackdown on due-diligence consultants started, are refusing to see that China’s problem is structural deflation due to over-supply of everything and not enough demand. Chinese CPI data today was only 0.1% y-o-y vs. 0.3% expected, so deflation looms. It’s already arrived in PPI at -3.6% y-o-y vs. -3.3% expected and -2.5% last month. In short, reopening was a nothing burger. The ‘shift to consumption’ sold for years has been mis-sold for year. China’s exports may be up again, but its import growth keeps slumping y-o-y: which the likes of the IMF are deliberately blind to seeing means China is a net DRAG on global GDP growth, not any kind of addition.

Yes, the West would kill for that kind of deflation right now. But because they have under-supply of everything and over-demand in services, they aren’t going to get it. As such --and given China will keep trying to export its way out-- the onus will be on the West to mirror China going forwards. That’s stagflationary or inflationary for longer, and higher geopolitical risks forever.

But of course not seeing, and deliberately seeing what’s not, reflect a larger human failing.

This week already saw former US president Trump ordered to pay a woman $5m for an alleged assault. That was rightly front-page news even in the financial press, and joins a long line of bad Trump headlines. Today, the same media are of course covering the arrest on alleged corruption charges of Republican Representative Santos. Yet they ignore the alleged corruption of the Biden family presented in Congress, as they did the Hunter Biden laptop in 2020, and the orchestrated campaign to ensure that story never surfaced. As US law professor Jonathon Turley notes, Congress “could produce eight heads in a duffle bag owned by Hunter and the media would still demand a luggage tag referencing the President.” That reminds me of the 2016 election, when someone stated that if video were found of Hillary Clinton eating babies, CNN would have decried Trump for eschewing eating nutritious children. And before the inevitable ‘whataboutism’ begins, Fox, Breitbart, etc., obviously do the same the other way round. It’s a universal problem.

That said, Trump was just on CNN for the first time in a long time and made one thing clear: he won’t back Ukraine further if he wins in 2024. Europe might suddenly need to start looking at their lofty rhetoric on values, at their feeble military muscle, and at the US opinion polls, if they still mean anything anymore.

That’s the point: it’s now hard to see any accurate information on anything. But we shouldn’t be blind to that uncomfortable fact, in life or in markets. Rather, we should open our eyes!

'Good' headline macro news (strong ADP and ISM Services beat) was somewhat trumped by 'bad' macro news (inflationary pressures re-accelerating under the hood)... all of which do nothing at all to support The Fed's 'easing' anytime soon (strong jobs and resurgent inflation).

Of course, today was all about Powell and his pals who signaled a 'hawkish pause' (despite the market's very dovish beliefs). June rate-hike odds rose...

Source: Bloomberg

Now it gets interesting...

Source: Bloomberg

With Real Rates positive for the first time since 2019...

Source: Bloomberg

Powell's comments did nothing at all to help (unusually):

• POWELL: SENIOR LOAN SURVEY CONSISTENT WITH OTHER DATA

• POWELL: POSSIBLY AT SUFFICIENTLY RESTRICTIVE LEVEL, MAY NOT BE FAR OFF

A recession is coming but don't expect rate-cuts...

• POWELL: POSSIBLE WE'LL HAVE WHAT WOULD BE A MILD RECESSION

Yield curve gives 94% odds of a recession within 12 months...

Don't believe the market's dovish hype!

• POWELL: FOMC'S INFLATION OUTLOOK DOESN'T SUPPORT RATE CUTS (the 'inflation is transitory' outlook?)

And that spooked stocks lower (not helped by Powell's hints at how bad next week's SLOOS data will be). Small Caps managed to hold on to gains but the S&P, Dow, and Nasdaq tumbled...

0DTE traders were betting on the downside in a big way today and took profits after the post-Powell puke...

Big reversal in "most shorted" stocks today (which helps explain the early gains in Small Caps)...

Source: Bloomberg

Regional banks puked after Powell said the banking system was sound and resilient...

VIX1D remains notably higher than VIX...

Source: Bloomberg

Treasury yields tumbled once again today with the belly of the curve outperforming (5Y -11bps, 30Y -2bps). It's been quite a week in bonds already...

Source: Bloomberg

The 2Y extended below 4.00%

Source: Bloomberg

The STIRs curve adjusted (small) hawkishly in the shortest end but notably more dovish next year on...

Source: Bloomberg

The Dollar dived on the day to two-week lows...

Source: Bloomberg

Bitcoin chopped around but ended marginally lower...

Source: Bloomberg

Gold rallied on the day (marginally)...

But crude was clubbed like a baby seal with WTI tumbling to a $67 handle intraday, dramatically below the pre-OPEC+ level...

Finally, the market remains dramatically more dovish than The Fed and Powell throughly rejected that view today...

And WTF is Powell talking about claiming that the banking system is sound and resilient and is stabilizing...

POWELL: 3 LARGE BANKS WERE AT HEART OF EARLY-MARCH STRESS, NOW ALL RESOLVED pic.twitter.com/1BQikU8iCy

— Newsquawk (@Newsquawk) May 3, 2023

2023 bank failures are now larger than 2008 and 2009 combined...

And deposit outflows continue from large and small banks...

Sorry Joe ol' pal, jawboning's not gonna out enough lipstick on this pig to fix this shitshow...

It's on you mate! The market is demanding cuts (and pricing them in) and you just made it worse.

Jeff Gundlach gets the last word: "...markets for risk assets are too complacent."

By Peter Tchir of Academy Securities

Smooth Sailing Ahead?

The market started off rough and looked incredibly shaky on Wednesday. However, a great performance by MSFT was one of the main things that held the broad markets together and they ended the week incredibly strong.

There were some interesting reactions last week. FRC dropped from $14.24 to $3.50, but KRE (a regional bank ETF) finished virtually unchanged and seemed to be able to shrug off the issues dragging FRC stock down. That sort of resilience is encouraging as it seems like the market is in the process of sorting out the banks that have been affected (from the rest). Yes, there are still issues with what banks may have to pay on deposits to retain customers, but this was very encouraging. I’m finding myself re-reading I Like Mid Banks, I Cannot Lie because we have learned a lot since that was published. I’m more encouraged than I have been in weeks in large part due to how we traded this week.

Inventories

GDP was weaker than expected, but much of that can be attributed to inventories declining. Since the inventory overhang (or even glut) has been a major concern (Moving Beyond Banks), this was encouraging news. Seeing GDP shrink because we are draining inventories is actually a positive because it sets the stage for future growth.

Having said that, two questions still need to be answered:

• Have inventories been reduced enough to start creating demand for increased production or are they still far too high? I’m leaning towards the latter.
• Were companies really able to sell a lot more (close to full price) or were they just reducing shipments so fast that even “mediocre” sales helped? There is some evidence that it was the former, which would be good, but the evidence is mixed at best.

While the inventory news was encouraging, the bar has been set quite low on that front, so I wouldn’t expect smooth sailing from here.

The Consumer

Consumption data looked decent. If we look at new home sales, durable goods, and personal consumption data, all of this points to a consumer that is still spending.

This is in contrast to increasing (but still manageable) delinquency rates on auto loans and credit cards. Yes, they are higher, but they are still below pre-Covid historical levels (at least for the data series that I’ve been tracking). However, credit card debt has been building, but not to alarming levels.

We have all become used to never betting against the American consumer’s willingness to consume, and maybe we have another round of high spending to look forward to, but I struggle to see that.

I don’t believe that the consumer will be a big tailwind for markets or the economy and I expect to see weaker data as layoffs start to take effect.

Inflation

Inflation seems to be stabilizing around levels that are “too high” but not “alarmingly too high”. Right around 4% is higher than the Fed (and incumbent politicians) would like, but it is in the realm of “manageable” and heading in the right direction.
As someone who expected deflation concerns to mount in the first half of this year, I am not worried about inflation rising. Yes, we had an uptick in reported data after “disinflation” gained some traction in January. However, we will learn that we are still headed down a path to lower inflation, because we were set on that path months ago when hikes were started (see
Mistaking Hard for Soft Landing).

Not a Short Squeeze

While markets did very well on Thursday (and even on Friday), there was less of a “squeezy” feel than in some prior rallies. I’ve seen some charts indicating that in some sectors, the “most shorted” names underperformed significantly (not what you would expect in a “short squeeze”). We already discussed FRC versus KRE, but ARKK (another crowd favorite) was down while QQQ (Nasdaq 100) powered higher and beat the Dow and S&P 500 on the week. If you told me that the Nasdaq 100 was going to be up more than other indices, I’d have guessed that ARKK would outperform (it didn’t). Similarly, the Russell 2000 was down on the week, pointing to some selectivity.

This price action is encouraging to me, because it isn’t just a bunch of bears getting stopped out. It is indicative of “new risks” being added with a degree of thoughtfulness that we didn’t see in many of last year’s “ripfests”.

M2

While not something that I pay close attention to, as Tom Keene exposed on Bloomberg TV (at the 1 hour 38 minute mark), the recent decline has been noticed by many people.

The Fed balance sheet, which I do watch, has resumed its decline as banks are using less of the emergency lending facilities and quantitative tightening is taking its toll.

This will continue to be a headwind.

The Fed

We get the FOMC on Wednesday, which all seems to boil down to the messaging that will be provided during the press conference.

Consensus is for a 25 basis point hike with talk of a pause. Since I don’t think that they should have hiked at the last meeting (or at the last couple of meetings), I can’t see why they won’t raise rates 25 bps (so let’s price this in). I also think that the “pause” is so long overdue that I’d be shocked if we don’t get some indication of this.

When I pull up WIRP it shows a high of 5.09%, so basically one and done, but isn’t that priced in?

Even as someone who thinks that a recession is well on its way, I struggle to see how the market is pricing in a better than 50% chance of a cut by September.

Expect messaging to be “higher for longer”, which I’m not sure the market is on board with.

Jobs

This week will be all about jobs, starting with JOLTS on Monday. Can they continue to surprise? Can we start to trust ADP (which was revised) more than the NFP data (where response rates are abysmally low)? Will some of the headlines about layoffs translate into weaker published data?

Finally, and maybe most importantly, will we start to focus on jobs at a granular level and see a disturbing trend (from an economic standpoint) that low-paying jobs are abundant, but middle to high-end jobs are being cut?

We continue to be in the camp that the negative economic impact won’t be a function of job losses, it will be a function of which jobs are lost (i.e., # of jobs multiplied by pay for those jobs will be the real metric to identify and react to).

Debt Ceiling

Will the Republicans’ successful vote bring Biden to the table for serious negotiations or will both sides dig in their heels because they are confident that they have the support of the voters? Or at least can they get the voters to blame the other side for any failure to pay?

When I look at 1-year U.S. government CDS (which I rarely look at), I see that it indicates a small (but increasing) probability of some sort of a “failure to pay” credit event.

As discussed in recent reports, I take a very simplistic view that given where some longer-dated Treasuries trade (70 cents on the dollar), a failure to pay event will create a 30 point gain for holders of CDS. With a price of 1.75 points, that implies slightly less than a 6% chance of a failure to pay. The CDS is much more complex than that, but I think that this sums up the basic logistics here. No one is buying U.S. CDS because they think that the holders of any debt (that isn’t paid) won’t get paid in full with interest. They are buying it in hopes of a credit event occurring that opens up the “cheapest to deliver” bonds.

So, it is wonky, but important.

I expect rough seas on the debt ceiling front!

It is possible that one (or more) of the NRSRO (Nationally Recognized Statistical Ratings Organizations) will decide to put the U.S. credit rating on credit watch for a potential downgrade. However, since most mandates that I see treat U.S. Treasury risk as its own asset class (i.e., not dependent on rating, unlike what we see in mandates for credit and structured products investors), I don’t think that any potential downgrade would move markets. Any Treasury sell-off linked to a downgrade headline should be bought. However, I would be in no rush to buy any corresponding equity sell-off.

From Made in China to Made by China

We wrote about this in Locking in Some Themes and discussed it in the aforementioned Bloomberg TV interview.

On Tuesday May 2nd, at 1:00 pm ET, Academy will be hosting a webinar on China’s Recent Geopolitical Successes and Influence (please use this link to register). Rachel Washburn will lead a conversation with General Marks, General Walsh, and myself on China’s recent ventures into the global political arena. We will examine what it means for our relationship with not just China, but also other countries and regions. China is certainly improving how it wields its influence on the global stage.

I’d be shocked if questions surrounding “reserve currency” don’t come up!

Bottom Line

A bit of a broken record.

Remaining at -4 on equities on a scale of -10 to 10. Based on price action on Thursday and Friday, I’d move myself closer to neutral or even bullish, but Wednesday felt so awful that I cannot bring myself to make the change to neutral so quickly. However, I certainly cannot get more “beared up” after the past couple of days. I am concerned that I am fighting the “one last hike and done” rally, but so much of that seems to be priced in that I’m willing to take that risk.

On rates, I expect that Powell and the Fed will try to push the “higher for longer” pitch. That will be bad for the front-end (say out to 3-years), so I’d expect yields to increase there. With the 10-year already at a measly 3.4%, it is difficult to imagine it going much lower (back to the hawkish Fed being bad for the front-end, but good for the long-end). But given how much everyone seems to hate the bond market here (apparently record short positions amongst speculators), I won’t bet on much higher longer-dated yields.

I think that the 2s vs 10s yield curve will become more inverted (again).

On the credit side of things, I still like to err on the side of caution. IG over high yield and high yield over leveraged loans (viewing it as big cap vs secured, but not necessarily well secured). In addition, I favor higher credit quality versus lower credit quality tranches on the structured products side of things.

I’d keep buying banks that trade cheap here, though much (if not all) of that trade has already disappeared.

Basically, on credit, I don’t see much downside to spreads (but very little upside), which is often an okay time to give up some potential returns in hopes of a cheapening event (that would likely occur if I’m correct on stocks).

With summer fast approaching, clear sailing would be nice, but while that’s a possibility, my current forecast is for more of the same choppy (but not dangerous) seas, which we just have to make our way through.