The View from 5th Avenue – 12 August 2022

While some are calling this rally the most hated of the past 12 months given investors have been taken off guard due to positioning, there’s no denying it is significant. Unfortunately, the latest data shows that HFs (non-dealers) are net short the S&P, in fact the largest notional short on record. The speed of this rally has left some unable to make the necessary changes, but that’s not stopping the markets. Keep an eye on 4177 on the S&P and 13k on the Nasdaq 100 though – if we go back below these levels, that would actually give the bears something to hold onto. This morning saw plenty of economic data, which also pointed toward peak inflation having passed. The latest University of Michigan data rose to a 3 month high on better expectations about both the economy and personal finances. Inflation expectations were mixed, and worth noting the year ahead outlook was reduced. Tech was the leading sector today as BAML noted investors are rushing back into stocks & bonds. The positivity on easing conditions may be overdone as the Fed’s Barkin said that more hikes are needed in order to control inflation. This disconnect between what the markets are pricing in and what the Fed is saying leaves plenty of room for a correction. Despite all sectors in the green, Energy lagged thanks to weaker crude, after OPEC forecasted the global oil market will tip into a surplus this quarter. With earnings season pretty much behind us, the market can now look forward. Next week has a bit of housing data, but the real headline will be Fed minutes on Wednesday. The market is pricing in 58% likelihood of a 50bp hike, and 42% of a 75bp one for the September meeting. This (relatively) dovish positioning leaves plenty of room for surprise.