while we slept; JPM profits DOWN, Dimon cautious; 100bps now, 3 cuts next year? and finally, the moment we've been waiting for (HIMCO dropped, maybe NOT what you'd expect)
Have at it and a while there may have been some surprise YESTERDAY in wake of the CPI report (Global Wall St reacts to the ‘shocking report, via ZH), especially given the 100bps HIKE by Canada (ZH), it’s good to know stocks steadied and bounced back sharply as it digested recap by (un)official Fed mouthpiece, WSJs Nick Timiraos noted by ZH
So was bad news good? Have to be honest with you, can’t say given this set of facts, and frankly am not 100% sure HOW I feel.
The Fed seems committed to at LEAST 75bps hike (but would now not at all be surprised by an attempt to shock narrative back). Ultimately what that may mean, I think summarized by couple tweets and charts by none other than EPBMacro,
As one commenter put it — Policy error(s) incoming … One comment does not a market / narrative make SO then … how about that idea where bull markets love supply? ZeroHedge,
… HEREis what another shop says be behind the price action overnight with their most recent morning commentary, Doldrums Dashed,
Overnight Flows Treasuries were mixed overnight with the front-end under pressure with 10s and 30s outperformed. Overnight volumes were elevated with cash trading at 133% of the 10-day moving-average. 5s were the most active issue, taking a 28% marketshare while 10s were a distant second at 23%. 2s and 3s combined to take 34% at 19% and 15%, respectively. 7s managed 8%, 20s 2%, and 30s 4%. We’ve seen two-way flows in 2s and 3s as well as buying in 10s.
The firm goes ON to suggest everyone high-tail it back from the beach as the summer doldrums have likely been cancelled (again).
… The Fed’s radio silence period starts Friday night; there is still a window of time left in the event Powell wants to push back against investors’ building expectations for a 100 bp hike. All else being equal, we don’t think the Fed will fight the 100 bp opportunity and will execute in the event it’s fully priced in come July 27. After all, the Fed isn’t in the surprise business. Is it?
Such an eventuality will put greater downward pressure on the yield curve and further reinforce the notion that monetary policymakers are actively sacrificing economic growth for long run price stability. Much has been said about the ultimate and eventual cost of this tradeoff and we anticipate that gauging the fallout will be the market’s preoccupation for the balance of the year. Returning quickly to the potential for a three-digit hike; the timing of data during that week is notable as Wednesday’s FOMC decision is immediately followed by Thursday’s first look at Q2 real GDP. In the event of a negative Q2 print, July 27 might be the last opportunity for Committee to deliver a pre-‘recession’ rate hike. On the margin, the optics could be an added incentive for 100 bp over 75 bp. One thing is clear, the summer doldrums have been canceled this year (again)…
… and for some MORE of the news you can use » IGMs Press Picks for today (14 July) to help weed thru the noise (some of which can be found over here at Finviz).
The only REAL news story driving markets at the moment, though is this, via RTRS
Central banks need to engineer disinflation and deflation in the prices they can influence to offset inflation in the prices they cannot influence. The deflation impulse increased in the June US consumer price inflation report; some new items (e.g., washing machine prices) moved into deflation. But deflation pressures did not increase enough to offset stronger inflation pressures. The Fed has to decide whether to encourage deflation more vigorously, or hope this will occur naturally.
The Fed’s two policy errors in June mean markets are likely to remain volatile. The Fed has less control over the CPI measure than it has over inflation generally, and emphasizing CPI adds volatility. While the Fed has guided that it intends to raise rates by 0.75ppt this month, the credibility of forward guidance (built over many years) has been thrown away.
The Fed’s Beige Book of anecdotes further confuses the picture. Comments suggest prices are high (of course) but there are also some references to demand concerns to restraining inflation, and profit margins being squeezed.
Today’s data retains a US accent, with US producer price inflation due. This matters most to corporate pricing power. As it is corporate pricing power that is driving inflation, the details here will matter. Initial jobless claims are also scheduled.
We could ALL use some more deflation … but for now, I turn TO … stocks. Especially ahead of PPI because, as one rather large British operation says,
All eyes on Margins 2Q22 earnings are unlikely to surprise positively and those for the next few quarters are likely to be revised down given the slowing economy as the Fed tightens aggressively and the rotation from Goods to Services consumption continues. Margins should continue dropping but inflation should help (nominal) earnings.
As this same operation focuses on MARGINS, it also was out with a ‘mea culpa’ and those ALWAYS stop me in my tracks.
A mea culpa, and a look at the next two Fed meetings While we are troubled by the strength of the CPI print, we believe markets have overreacted by pricing in over 160bp in hikes over the next two Fed meetings.
… Given the upside surprise of the last two reports, we are somewhat gun-shy. We thought that the Fed would be able to move to 50bp in July, and we were wrong. We have also been surprised today by markets repricing the July meeting to over 90bp, and we do worry that the Fed might feel forced to go along with market pricing. But the preponderance of evidence still suggests that the cumulative Fed path over the July and September meetings is likely to be milder than current market pricing.
And then, there’s a couple from BBG. First up THIS from John Authers as we’re all NOW debating whether or not the Fed will pull a Bank of Canada-like surprise (100bps HIKE)
… This shifts expectations for the Fed. Since the last meeting, the decision for thecentral bank’s governors when they meet at the end of July had been perceived to be a choice between hiking by 50 basis points or by 75 basis points. Now, at least 75 basis points is priced in as a certainty, while the chances of a blockbuster 100 basis-points hike are now put at about one in three:
This matters a lot, obviously, and the Fed will need to balance the desire to shock the market out of any new inflationary habits against the risk of being perceived to have lost control if it raises that much…
… Markets expect the Fed to giveth after Wednesday's scorching inflation print, but they also expect it to quickly taketh away. At one point, traders priced in a 3-in-4 chance of a full percentage point rate hike this month, with 75 basis points now completely beyond discussion. But investors are also pricing in more than three rate cuts next year, anticipating a rapid Fed shift to an easing stance as the US economy recoils from the impact of aggressive hikes in 2022. As often is the case with shock economic data points, financial markets whipsawed after the inflation beat, meaning it's probably more instructive to wait for Thursday's price action to gauge the true investor response. But the Fed hiking the economy into a recession narrative looks a little stronger this week and that points to a lower ceiling on bond yields and trouble ahead for stocks. It still leaves open a path to further dollar strength as what the greenback might lose on yield support, it will likely make up as a haven play.
With rate CUTS in mind, I want to mention only two more items. First, from ZH, Larry McDonald of The Bear Traps Report (via ZH)
"Take The Tragedy In Sri Lanka And Multiply By Ten": The Fed Just Lobbed A Financial Nuke That Will Obliterate The Global Economy
Finally, beginning this mornings note with some of EPBMacros thoughts (tweets) and ending with the latest from Lacy Hunt of HIMCO is an utmost pleasure. It is ONLY 4pgs and I’ll let you guess what he thinks. Before you do that, allow yourself to keep an open mind (knowing full well he does, too, in his secular stream of consciousness), and go along onthis short 4pg journey WITH him.
I URGE you to read the 4pgs — I have (a few times overnight) — because you THINK you know what his conclusion means BUT I’d argue this is far from the most bond bullish conclusion I’ve ever read.
…Conclusion Monetary considerations coupled with these real side indicators point to recession and a reduction in inflation and long-term Treasury bond yields. If the Fed stays within the scope of the Federal Reserve Acts, they will have difficulty in containing the recession and fostering a recovery. But that situation puts us on alert to the possibility that the Fed returns to a Pandemic type of response that generated an inflation rate far above their target, as the experience of the past two years has so painfully taught. The economy might recover temporarily, but the expansion would be interrupted by another cost-of-living crisis and the Fed would not achieve either of its mandates for employment or inflation.
