The View from 5th Avenue

Initially, it looked like Microsoft (-7.7%) and Alphabet’s (-9.6%) reporting foibles overnight would not interrupt the current uptrend. Markets spent the first few hours of the day climbing higher in the face of tech-versity, assisted by the Bank of Canada after they surprised with a smaller than expected rate hike. Surely, a leading indicator for the Fed!? The USD 10yr even fell below 4% for a spell – another positive sign. But then came a dose of reality…or mean reversion.

The sound of silence can be deafening sometimes, and markets have been roaring since last Thursday. After a WSJ article suggesting a smaller FOMC hike in December (therefore breaking the 75bps trend), and Mary Daly mentioning a “step down”, the Fed has been in their quiet time ahead of their next meeting. That has forced traders to rethink the rate trajectory amid a new earnings period, and memories of the July market move under similar circumstances. As October is coming to a close, stocks have put together a nice three-day rally.

Markets drifting higher to kick the week off ahead of much-anticipated earnings from the likes of “Big Tech”. Equities seemed largely unimpressed with depressed PMIs across the globe- all signals pointing to the tightening-induced contraction we’ve been on the lookout for. US Manufacturing component fell below the 50 mark for the first time since June 2020 along with Services well below expectations, and therefore, bringing a disappointing Composite print.

Markets moving higher to close out the week in Friday trading on a positive note. For those counting, that’s 3/5 higher for the week and swinging the pendulum back from last week’s losses. In sticking to theme- it was another day, another lesson of ‘don’t fight the Fed’. But in an interesting plot twist, we found ourselves re-calibrating the skew away from that entirely of the hawks now slightly a touch back to the doves. Or, in other words, rates moved lower (off of new peak levels we’ve not seen in the past decade) and Equities rallied as a result.

In a moment that will be remembered for generations (and apologies for including the UK in a US wrap), the shortest tenured British Leader resigned. Ahead of this (and after), there was little changed from a macro perspective. We continue to watch 1640/1780 on the Russell Futures, and 3806 as a resistance on S&P futures – which we barely looked to approach, let alone test, before turning lower. Pre-market earnings did send futures higher early on, with both AT&T and American Airlines reporting better than expected numbers.

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.

Markets found relief in a broad-based rally today– ~95% of the S&P trading in the green- and what we would notably tag as a bear market bounce. (pssst- the 10yr yield has quietly crept back and again closed above 4% despite equities rallying higher and an ongoing reminder that inflationary concerns remain amongst us.) After suffering losses 4 out of the 5 trading days last week or a grand total of 7 out of the previous 8 sessions to ultimately reach a 50% retracement of the Covid rally on the S&P, we find ourselves (alongside UK PM Truss…) taking a necessary pause-and-reflect to start the week off.

Yesterday was a bit of a jaw dropper, but from a macro perspective things remained unchanged. Going into today the big question was whether the bounce would continue, but a surprise from both Retail Sales and University of Michigan prevented that from happening. The headline Retail Sales figure missed, and spending in 7 of the 13 retail categories declined last month. University of Michigan sentiment did come in higher than expectations, but the one year inflation outlook ticked up for the first time in 7 months.

Today seemed to defy gravity and logic. One example -– The SOXL. which was down -15.4% on the lows then procured a +20% intra-day rally to end the day +9%. But that wasn’t the only wild swing — the S&P swung over 5%, Bitcoin swung over 6% and JNK (HY Bond ETF) almost 2%. Not to mention, the Yen tested its former 1998 high at 147.66…and the 30yr fixed mortgage rate bumped up against 7%— nothing like the 80’s of course, but still 20y highs. That said, looks can be deceiving and some of the moves didn’t paint as clear a picture of a shift out of bonds and into equities as one might have expected.