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.

Not the end to the week we were hoping for As I go to end the week with a view entrance that’s been used too often recently, it’s fitting – the same trends we have seen recently continue to be present. Still negative economic data combined with a yield curve that shows massive uncertainty in the short and long term gives investors plenty of pause as recession looms. Add on the fact that the US 10-year real yields are above 1%, the highest level since 2018, and the safe haven USD is the place to be. And yet, the VIX remains low – we seem due to grind lower (although a move like today is certainly harrowing). Positioning continues to be negative, with the latest non-commercial S&P futures data showing renewed selling. There’s plenty to talk about– triple witching was always going to induce some interesting moves, while unexciting (although slightly better than expected) University of Michigan data prevented the markets from a happy end to the week. There was a sour taste to the morning too – FedEx last night with a massive miss led it to its worst drop since the crash of the ‘80s. This led the S&P to dip below the short-term support we have been watching (3900 on S&P futures), although the 10-year yield couldn’t break its 3.5% resistance. The momentum to the downside continues, although for the optimists, the S&P bounced 6 out of the 8 weeks immediately post options expiry in 2022. There was certainly a defensive flavor to the day, with Staples, Telcos, and Utilities outperforming. Semiconductors also outperformed after INTC announced its dividend and a new processor. Any good news in such a damaged space sure to induce some covering. With the BofA Bull & Bear indicator barely ticking off of lows and overwhelmingly negative sentiment, contrarians must be licking their chops. Maybe things could finally get better once the Fed is out of the way (17% probability of a 100bp hike). Then again, why buy the dip now? Enjoy the weekend. 

The respite after Tuesday’s bludgeoning was, sadly, short-lived. We remain in the same range we have been in, and the market feels like it’s still waiting. For what though? Too much on the horizon to pinpoint one event. Yesterday the number of 12-month price lows rose to 103, and as short-term breadth continues to deteriorate, we remain cautious. Indices are still above short-term supports though – 3900 on S&P futures and 12,000 on NASDAQ 100 futures. The headline move was actually in gold today – it has inched closer to the lower end of the range it’s been stuck in the past 2 years, and a significant break below 1676/1670 would open the potential for a further drop to 1569. This move would also reiterate the Dollar’s strength, which continues to push towards the long-term 120 target. Mortgage rates were also grabbing eyes today, as the US 30-year fixed mortgage, chugs its way to the next technical target at 6.5%. Homebuilders were unsurprisingly pressured. The indices were indecisive for most of the day before taking a turn lower in the afternoon. Energy and tech dragged as crude dipped after news yesterday that the US had to refill its strategic reserves. Tech was hurt by the move higher in yields, and mega names continue to populate our 12-month relative low list. Microsoft is on a relative support, as is the SOX. Google, Nvidia, and Meta are three more to monitor. Tech was also dragged lower by Adobe, which was today punished for news of a $20B acquisition of Figma, closing down 16.89%. Banks outperformed as yields moved higher, although the BKX’s move higher hid the fact that it continues to trade in the same tight range it has been this month. Tomorrow brings the latest University of Michigan data, and after admittedly “meh” retail data this morning & a hot CPI print, we will see what consumers are really feeling. Hopefully will be a good end to the week, although with triple witching tomorrow, things could get volatile.

The market rallied early this morning for reasons nobody predicted and nobody can explain. Lack of conviction? Probably. Repositioning going into Friday’s Triple Witch expiry? Likely. Profit giving followed by profit chasing? Definitely. Either way, US markets drifted sideways throughout the afternoon, then rallied into the close again with nary a positive headline in sight (but recession signs in the form of inverted curves ever present).

The worst hit on The S&P since June 2020 and The Nasdaq 100’s biggest intraday drop since May 18th , has left The Fed with no alternative but to slam on the brakes of the economy, with even tighter financial conditions. Or rather, hot inflation and labor markets have left The Fed with no other option. Today’s CPI print (and gap higher in the Fed “Terminal rate”) has basically served to increase the odds of a dreaded “Hard Landing.” Traders had built in muted expectations for the CPI today. Lower energy costs should lower inflation, they said. It will be easy, they said. “They” weren’t expecting the other parts of the index to rise. There was plenty of speculation around in terms of what caused CPI ex-Energy to miss, but with so much of the basket moving higher, it’s clear there’s a larger, more persistent trend at play. The odds of a 75bps hike now stand at 66% and 100bps now at 34%, though more aggressive hike expectations could leave investors pleasantly surprised when the time comes. The result of today’s shocker was the undoing of the last 4 days of positive moves. The SPX fell back below 4000 (support at 3900), and the Dollar (DXY) ramped back up +1.4%. The weakness in equities was broad based, with ZERO stocks in the green for the NDX, and only 5 for the SPX. That said, we still remain in the same range we have been ranting about – even the 10 year’s move higher (up as much as +22bps at one point), stopped short of the 3.5% resistance level we have been watching. All sectors closed in the red, with Energy the “least bad” after commentary from OPEC indicated continued strong demand (though the sector is still hanging onto +1.7% worth of gains this month and +44% ytd). Biden’s commentary on the Inflation Reduction Act this afternoon and news that Twitter (+0.8%) shareholders approved Elon Musk’s $44bn buyout, was mainly ignored. But Triple Witch and CTA positioning cannot be. And we’d bet the PPI release tomorrow will now have everyone’s attention.

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? 

A positive end to the week was a refreshing change, but would have been better if indices weren’t still firmly range bound. S&P futures are at least in the upper end of the range, with 4200 on the S&P futures as the next resistance, though we’re also still keeping one eye on the 3900 support. Noteworthy that the move into risk assets hasn’t just been in tech, a laggard this month (energy has been the month’s worst performer). In fact, the US tech ETF made a 12-month relative low, while the Consumer Staples/Financials ETFs made 3m relative highs. Possibly a sign of where money is being put to work. Separately, the formerly unstoppable DXY suffered its third straight day of losses, while the AUD enjoyed its 4th best up day in 2 years. And Gold stayed towards the lower part of the range from the past 2 years — $1760, a key USD resistance. Today was light on the economic data front, but heavy in terms of Fed Speak. The members were not mincing words ahead of their unofficial quiet period which starts this weekend. Bullard reiterated his hawkishness early on and was followed in kind by Wallers and George. Nothing new was said per se, just reinforcement of their commitment to a “significant” hike in two weeks, which historically means 50-75bps. The good news was the “not new” comments were mainly ignored by the markets, and allowed for a nice little rally to end the week. Like the uber bearish BaML Fund Manager July survey that actually set the mid-summer low for the SPX, Lipper data showed another $12bn of outflows last week, following the previous week’s $10b. Though there has been no real change to investor bearishness, major indexes find themselves trading again ABOVE their 50 and 100 day ma’s. While next week will be quiet in terms of The Fed, there will be plenty to monitor — notably CPI Tuesday and PPI Wednesday. Peeking at the monthly price of Crude on Bloomberg for August has it at $91.48, vs July’s 99.38. And using our crude analysis (pun intended), would suggest another drop for the CPI (bbg ests m/m -0.1%). That said, a better than expected result could keep this equity rally going (and Dollar weakening), right into the Triple Witch Friday, and as dealers are forced to adjust their deltas. Say hello to the pain trade…

“She was more than a monarch, she defined an era.” – Those felt like appropriate words to reiterate, and I’m thankful someone came up with them. It was a struggle to open the day’s recap without first acknowledging the passing of Queen Elizabeth II, an iconic figure to say the very least. As the Queen herself said: “grief is the price we pay for love”.

New day, new sentiment. The same themes we’ve been tired of hearing about seemed ready to weigh on investors again this morning. A grind lower was expected, but we got just the opposite – markets bounced off their short-term support levels. S&P futures moved in the green after testing and holding the 3903/3900 August low, although as long as we remain below 4018/4022, the trend remains to the downside. One of today’s most notable events is the dip in oil. December 2022 Brent futures dipped below the support at $90, and the next technical stop is the March low at $85. Energy is unsurprisingly the underperformer, with all other sectors in the green. Utilities are the day’s outperformer as yields came off, and the energy crisis (as mentioned above) cracks on. Today also brought the Fed’s Beige Book. The report showed that growth had slowed, and consumer spending was steady. There was notable weakness in housing, and price gains appeared to be moderating. Today’s move higher likely aided by the dovish implications. The probability of a 75bp hike at the next Fed meeting is down to 76% from 80% this morning – the Fed has communicated how aggressive it needs to be, and nothing can change expectations in the short term. Then, there was the dollar, which has been an absolute steamroller. The DXY remains firm, hitting a 20-year high today, but it took a breather today before the next stop at 120. Finally, as tomorrow brings Chair Powell, keep an eye on the VIX, which (for now) remains well below the next stop of 30/30.22 on the way to 35.0. It would be surprising if his narrative were different, but the market may need a small reminder of his plans after today…

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.