Andrew Chader

The 10-yr yield has been threatening 4% for the last few sessions and it finally moved through to close at 4.13%. Granted every investor is fully aware of the Fed’s intention, with 75bps expected in November, and very likely in December. But seeing it close at the highest level since 2008 remains stark. Economic data today was housing heavy, and it showed the weight of higher rates. While Building Permits ticked slightly higher (+1.4% m/m), Housing Starts fell after their brief August pop (-8.1% m/m), and Mortgage Apps fell once again.

With the S&P 500 down 22% ytd, it is not hard to see the negativity that investors currently have. The various headwinds remain, and only seem to be broadening. But the investor spirit cannot be gloomy all the time, and that provides opportunities in the short term. After last week’s intraday turnaround, traders have been cautiously optimistic that indexes can continue the path higher, and today’s S&P gain was the first back-to-back daily gain in two weeks.

October started on a very positive note, even though the broader macro environment had not really changed. Yes two different central banks surprised investors with their moves. But one was to stem the slide in Gilts (and LDI margin calls), the other only by raising 25bps (which the RBA said they were going to do). The Fed however, is not in a position that warrants a change in their direction, and the +5.5% move in the S&P 500 early this week only cements their determination to tighten financial conditions.

Tuesdays are the blah day of the week, not really doing much except to fill in the five day work week. But markets have deemed the day appropriate to shake off any Monday weakness, and hence the term turnaround Tuesday has been coined. With the S&P 500 closing at a one year low yesterday, today was full of potential for stocks, and indexes started in the green.

T-minus 24 hours and markets are in full tizzy. How much the Fed will raise, and maybe even more important, what they will say afterwards, has investors feeling very defensive. The hawkish message out of Jackson Hole, a still strong jobs market, and a CPI that hasn’t shifted, is making this meeting a tough call. Most expect 75bps and “higher for longer”, but the outlier would be 100bps. Does that mean 4.5% is the terminal rate? And if it is, when will the Fed get there?

Paralysis through analysis created a slow start to an important week. Another rate hike by the Fed is now less than 48 hours away, and the topic has been discussed ad nauseum with plenty of investors attempting to dissect not only the inflation picture, but also the peak level the Fed will get to. Given the current positioning amongst participants, doing nothing is the best way to be cautious. Weighting towards equities are already at lows, as short exposure via S&P futures (according to CFTC data) is at its highest level since June 2020.

Investors continue to tread carefully in this market, and with a datapoint that is on everyone’s calendar tomorrow, the tape felt cautious. Yes, every sector closed in the green, as did the indexes, but volume was light for September and sector performance was relatively bunched. Inflation has been drilled into everyone’s brain and with a Fed that is intent on taming it, CPI will remain important. Tuesday’s reading is expected to show a headline that is sequentially lower, while core higher (y/y). That juxtaposition shows the difficulty the Fed has in the quest, and why the Street (and most Fed heads) expect a 75bp hike next week. Lipper data last week showed continued outflow from equities (about $21bn over the last two weeks) and that positioning has led to four days of gains for the S&P 500 and Nasdaq. Investors are still bearish, but at some point the selling stalls, and equities rise. Apple (AAPL +3.8%) helped Technology (3.3%) outperform post their first weekend of pre-ordering the new iPhone, and Energy (+1.8%) followed Crude’s +1.5% bounce. Semis lagged slightly (SOX +34bps) as Washington is expected to announce a limit on chip exports to China later this month. As equities are seeing limited love from investors, the Dollar is the opposite. But similar to stocks, the Dollar (DXY down 64bps) saw some position paring ahead of tomorrow. Lastly, the move in equities usually comes in tandem with Treasuries. The 10-yr yield started to improve upon Friday’s close, but the US auctioned $41bn of 3-yr notes plus $38bn in 10-yrs, and that latter auction was met with tepid demand. Bid to cover was 2.37 versus the previous 12 average of 2.48, and indirect participation was only 62.3% (vs 68.9%). Post the 1pm auction, yields moved to 3.36% from the pre-auction 3.3%. Tomorrow’s trading direction will start at 8:30, and traders will not hear any rebuttal to those datapoints since the Fed is in their quiet period. Equities have had a nice bounce since September 6th, but many think this is just another bear rally. Could the broader indexes have another plan up their sleeve? 

Even with a long weekend under their belt, investors were in no mood to look at the markets positively. The themes remain the same, and the negativity highlighted once again. China has been locking down due to covid (65 million people), Nord Stream is shut for maintenance, and Australia raised rates 50bps to start this week of Central Bank meetings. In the US, ISM Services data rose to 56.9 in August, its 27th straight month above 50, indicating the economy could allow the Fed to keep to their higher for longer mantra (something Powell will likely talk about Thursday). 3900 has been a level the S&P 500 has been using as a short term support, and that battle continued throughout today’s session. Reits (IYR +1.15%) outperformed as Costar (CSGP +7.5%) and Invitation Homes (INVH +4.7%) will both be added to the S&P 500, but most sectors closed lower. Semis fell 1.2% as the index trends back to this year’s lows, and the broader weakness in tech (mega names -1% on average) led to a seventh down day for the Nasdaq. Last time this happened was in November of 2016. A similar red theme occurred in Treasuries with the 10-yr yield rising to 3.34% as traders positioned for a busy week of IG supply. According to Bloomberg, $50bn is expected to be priced (McDonald’s and Walmart were mentioned), adding to the selling pressure USTs have been witnessing since Jackson Hole. With the lack of confidence to support equities right now, investors will likely keep to their cautiousness. Tomorrow the conference calendar picks up, and that could lead to companies updating their outlooks (Church & Dwight lowered FY revs this morning). Adding the Beige Book at 2pm (good news is bad news), and markets may have a weak Wednesday.

The aftermath of Jackson Hole continues to filter through the markets, with supportive jobs data maintaining the latest estimates for a 75bp hike in September. Both treasuries and equities are feeling the re-repositioning as they come to terms that the Fed is in for the long term (for now), which will likely flow into the next month and the next FOMC meeting. Futures pre-market were enjoying a nice bounce, but a bigger than expected Job Opening number, combined with a Consumer Confidence reading of 103.2 (versus est. of 98), halted the green and led to losses across the board. Good news via job growth means the Fed has more leverage to raise rates and leave them, and that is not what the markets want to hear currently. Every sector fell, with Energy (XLE -3.39%) and Metals/ Mining (XME -4.2%) lagging, and the S&P 500 ultimately closed below 4000 (and below the 50 day). If there was any doubt of the Fed’s position, speakers today hammered the must tackle inflation message. Barkin, Bostic and Williams all read the same script when they spoke; rates and policy needs to be restrictive, and that one datapoint (July CPI) is not enough. Jobs data will remain the theme for the week especially with the nonfarm payroll out Friday. Current estimates are for a gain of 300k, but after last month’s surprise beat, traders will likely be playing it safe until after the long weekend (US is closed next Monday). That means lower volumes will keep the volatility high and exaggerate moves. Hopefully the S&P closing below 4000 falls under that this week, or next month could be a tough end to the quarter.

The dog days of summer are here and that may be helping keep US markets elevated. Volumes on the S&P 500 were down 14% versus the 20 day, and overall volumes were only helped by a surge in interest in the meme stocks (Bed Bath Beyond up another 29% today). But before traders pass the blame, the repositioning that started last month is continuing to find its way into stocks. In July, the BofA Fund Manager survey showed cash levels at their highest levels since 2001, and equity positioning at 2008 levels, and today’s survey showed a slight decrease to those fears (“apocalyptically” was the word to describe July). While managers are still bearish (58% see a global recession), they cannot sit on cash if the S&P starts to move higher (it is +11.4% since July 15th) and therefore even nibbles are helping support the indexes. Retailers were the center of attention today with earnings from Home Depot (HD +4.1%) and Walmart (WMT +5.1%) helping spur a late morning rally for the S&P (10 of the top 20 performers were in the Retail sector). But as the index tested its 200-day moving average (4326) for the first time since late-April, the S&P could not manage to punch through, still closing above 4300 however. The consumer theme will continue tomorrow with July Retail Sales expected the show a m/m increase of 0.1%. Plus, investors will see earnings from Lowe’s, Target and TJX. Perhaps the biggest datapoint to monitor will be the Fed Minutes at 2pm. Since the Fed raised rates 75bps last month, estimates have been oscillating between 50 and 75bps for September, and traders will be keyed into any insight to direction, especially after the CPI last week. So far, Fed heads have maintained their rate hike communication discipline, even if the Street is looking for a transition to cuts next year. A realization that higher for longer is the reality could impact the recent momentum in stocks, but maybe the next downdraft could be met with sponsorship by the “apocalyptic” crowd.