Just when investors thought they had the current state of the Fed figured out, they were met with a much bigger Nonfarm Payroll datapoint. For the last few weeks, some companies had been talking about pausing and rethinking their hiring plans as recession/ higher rate worries made its way through the system. That led to the Street estimating just 250k in nonfarm payrolls gains for July. But today’s print of 528k, and subsequent unemployment rate drop to 3.5% (50 year low), surprised everyone. Job gains were widespread, and hourly earnings rose 5.2% y/y. This great result however did not sit well with investors intent on finding an out from the higher for longer Fed trajectory story. Prior to today’s NFP, CME data showed a 66% chance of a 50bp hike in September, but that has now shifted to 70% for 75bps. This week, Treasuries have had to reprice the timeline for the Fed pivot to cuts, and the number today pushed yields higher once again (2yr closed at 3.24%, 10yr at 2.83%). Equites have held up though, as the S&P 500 gained 36bps and Nasdaq 2.15%, for the week. Tech and growth had been a driver of the recent equity performance, but today the sector/ factor underperformed. Semis finished 91bps lower after Western Digital (WDC -5.6%) earnings weighed on Micron (-3.7%). Media fell 1.13% after Warner Bros Discovery WBD -16.5%) also missed. Energy closed higher by 2%, helping minimize the weekly loss to 6.81%. Crude however, still managed to remain under the psychological $90 level today, finishing at 88.30. With most of this earnings season now completed (87% for the S&P 500), investors will concentrate their scrutiny on the Fed. Next week’s economic calendar has a CPI reading due on the 10th, and PPI on the 11th, and estimates are for a sequential drop (except CPI core y/y). Treasuries have gained recently in anticipation of a quicker Fed pivot, and this has provided a bid to equities (main indexes above their 100 days/ CCMP and RTY above June highs). But after today’s nonfarm stunner, the Fed may have more room to maneuver with their tightening, forcing investors to remain hyper-focused on Powell and Co.

After yesterday’s Weibo stats showed exactly how much attention was on Pelosi’s visit to Taiwan, her actual meeting had far less exposure. The tensions lessened, and investors were free to trade with one less concern. Earnings, economics and the Fed’s end game continue to drive the current investment environment. Treasuries focus on a recessionary outcome has led to a rally in yields and future rate cut expectations, and that has fueled a return of interest into the Tech/ Growth area of the market. S&P Growth outperformed Value by 6.9% in July (2% last week alone), and that move continued today by another 153bps. While it is easy to point to the mega-tech team as the leaders, Semis (SOX +2.6%) and Software (+2.5%) also moved. The only sector to close in the red today was Energy (XLE -2.8%). OPEC+ at their ministerial meeting today decided to only increase production by 100k bbl/d in September. But EIA data showed a weekly decline in jet and motor oil (19% and 7.6% respectively), pushing Crude to close below $91 for the first time since the Russian Ukraine invasion.

This week has been busy from every angle for investors, but one of the main expected events was the FOMC. In their battle against inflation, the amount of basis points they were going to hike today has been a daily conversation. Ahead of their quiet period, 75bps seemed the likely outcome (Bostic, Daly and Bullard were in agreement). Without a WSJ article suggesting a change in tactic this week, the Fed raised rates by 75bps, surprising no one. Like the Fed, markets have been monitoring economic data and its recent deterioration, and have rallied this month in anticipation of future rate cuts in 2023 by Powell. This has led Growth to outperform Value by 210bps as of yesterday’s close, and that lead accelerated today to close at 490bps.

For the last few weeks, investors have been devouring every economic datapoint and comment from Fed speakers, in an effort to apply a probability to future Fed moves. But the calendar has shifted into the pre-meeting quiet period and participants can focus on earnings, at least for the next week. Concerns going into this earnings season were lingering supply chain tightness and inflation impacts, and companies ability to handle those.

Markets for the last month have been trading relatively sideways. Investors have come to terms that the US economy may be heading towards a recession, and that makes every datapoint that more important. As the next FOMC meeting is only 7.5 trading sessions away, the debate of 50, 75 or 100bps continues to rage. This week alone has seen a shift towards 100bps (75bps still is the favorite) as CPI and PPI were higher than expected.

Yup, that’s four days in a row for those of you counting. 2022 has been a tough year for markets, so accomplishing four green days consecutively is a win. By the way, this was last done in March for the S&P and Nasdaq. With little new news to change the short term positive momentum, traders stuck to this week’s themes, buying growth/ mega tech. The Growth versus Value trade has outperformed by 4% since last Friday (for the S&P), and a few big tech names have closed above their 50 day moving averages (Apple, Amazon, Google and Microsoft). While the broader indexes remain below their 50 days, those levels are within striking distance. Today’s session had most sectors higher.

Investors have had to contend with some interesting markets recently. Last week, it was the case of futures/ indexes being bid up early, and then watching everything trade sideways for the rest of the day (happened last Tuesday, Wednesday and Friday). But today the intraday chart for the broader indexes, and pretty much every non-energy stock, was diagonally lower. While the move started just before the Consumer Confidence data was released, it is hard to say if an inline result would have made any difference… remember, the calendar is at quarter end, and accounts are repositioning. Investors are watching the economic data intently, not only for recessionary signs, but also for clues to how long the Fed will keep raising rates. And today’s Consumer Confidence showed a drop to 98.7 (versus estimates of 100). While the Present Situation dropped to 147.1 from a revised lower 147.4, the Expectations Index fell to 66.4 from last month’s 73.7, its lowest level since 2013. Investors will not need to wait long for the next series of data for added insight, as Personal Spending/ Income and PCE come Thursday.

Yesterday saw across the board green as markets bounced off a horrible prior week. But investors have been taught to sell those green days with the complicated macro headwinds, and overnight recession concerns pushed futures lower. We are getting close to quarter end however, and the indexes are nursing some double digit losses (SPX down 17%, Nasdaq down 22%), giving hope that some month/ quarter end rebalancing may give some respite. And therefore when you look at the intraday chart of the S&P 500 today, and compare it to yesterday, they basically look very similar. Rally early off the lows, and then trade relatively sideways into the close. Only difference is that today had slight losses. While every sector yesterday enjoyed the bid, only a handful today closed in the green. Homebuilders (ITB +1.23%) and Biotech (IBB +1.23%) led, as Energy (XLE -4%) and Metals (XME -3.8%) lost. While stocks enjoyed another sideways day, Treasuries and Commodities did not. 10yr yields fell to 3.15% from 3.3% yesterday; Crude fell 4.8% to 104.20, and Copper 2.57%. These assets are monitoring the potential economic slowdown as direct correlations, and the weakness led to losses for their corresponding equity sectors (only ones with ytd gains as well).

Well, Powell did warn investors back in May that it would be painful. And as the Fed continues to ween more than a decade worth of stimulus/ low rates out of the system, it has been exactly that. T+1 from the FOMC’s 75bp hike, traders reacted to the news by accelerating their de-positioning as expectations of a pending recession grows. The surprise hike by the SNB today, along with the expected BOE, left participants on edge, and the final tally across the board was deeply red, with the best performing sector, Staples, closing down 76bps. The S&P finished down 3.25% and now is back to the December 2020 level. And for Nasdaq, down 4.08% today, back to September 2020. Everyone is either now bearish, or very bearish, and the CNN Fear and Greed Index is now at 14 (yes, it has gone to zero). Excluding Staples, the average sector move was down 3.3%  Homebuilders fell 7% as the 30yr mortgage rate rose to 5.78%, and Housing Starts data fell 14.4% m/m. Semis dropped 6.2%, Energy 5.6%, Retail -5.1%… you get the point. Treasuries rose today, with the 10yr yield closing at 3.18% (versus 3.29% yesterday). High Yield on the other hand, is near their March pandemic lows, as the Fed is no longer supporting the space, and investors are concerned about potential bankruptcies during a recession. Stress is definitely building. What will mend the current sentiment is still unknown, but tomorrow happens to be a Triple Witch expiry with over $3trln expiring. Perhaps the most important part for those staring at the end of day volatility is that some gamma will also be expiring, alleviating some of the dealer hedging that is also moving indexes recently. Unfortunately, any respite from the option market feels like it will be short-lived, but maybe, just maybe end of month/ quarter will provide some support. But that is still 1.5 weeks away, a lifetime in this current environment. 

In what has to be one of the quickest rates of change in FOMC communication history, estimates have moved from 50, 50 and 50 for the next three meeting to 75, 75 and 50… and under 24 hours. All without the Fed saying a thing. The WSJ started the conversation, and many economists have jumped on, now markets just need to see of Chairman Powell comes through. The increase in expectation did little to offset nerves of traders today however. Producer Prices data was mixed sequentially (higher m/m, lower y/y), and after four very red days for the broader indexes, it appeared that traders were prepared to take some stock. But bear markets are prevailing, and Yields continue to price in the aggressive Fed, and therefore appetite for risk remains minimal. Treasuries fell once again, and the 2-yr is back to 2007 levels. Considering it was at 2.81% on June 9th, today’s closing yield of 3.437% shows how quickly the market is changing. Equities were a bit more steady today. The S&P 500 fell another 38bps (after losing 10% the last four sessions), but Nasdaq was able to gain 18bps. Transportation stocks outperformed after FedEx (+14.4%) raised their dividend and came to an agreement with activist DE Shaw. Staples lagged, led by Coca-Cola (-3.4%) on news they would delay their Coca-Cola Africa bottling public listing. Overall though, today’s lack of movement in the broader indexes felt more like an indecision ahead of the FOMC tomorrow. Volumes were still slightly elevated (+9% vs June average), and the breadth stayed negative for both the S&P and Nasdaq. So investors now have a half a day until they find out the Fed’s intention. Recession indicators are building, but not flashing yet. The Oil price remains high, University of Michigan dropped to its lowest ever, yields are close to inverting (2-10yr spread at 4bps), and the Leading Index on Friday is expected to drop for a third month in a row. Powell and the Fed have their hands full as they confront attacks on all sides, some of which they cannot control. It won’t be long until we see how the market responds to an aggressive Fed.