High Hopes For A Fed Pivot But Oops There Goes Powell Again — What Fixed Income, Currency & Commodity Markets Are Telling Us
Just as volatility had begun simmering down Jay Powell surprised markets with a bruisingly hawkish press conference that began with intimations of a pivot and ended with the hammer. Yet the market selloff that ensued simply traced the recent rally back to intermediate support, and suggests further upside as seasonal sentiment mixes with midterm hopes for a GOP victory. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 remains short-term bullish and long-term bearish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise modestly over the next few days before beginning a new leg lower by mid-month.
Equity volatility in the cash market has come down a notch and pulled the VIX down with it, typically a sign of a higher highs to come. The derivatives markets have been consistently bullish and reflect bearish positioning among institutional investors and high cash holdings, which obviate the need to hedge with derivates. Bond market volatility has also declined despite the deep dive in short term rates, reflecting the deeper inversion of the yield curve and its implications for a moderate recession in 2023. Investors are clearly sanguine about a recession and hoping that disinflation accelerates and sets up for a bull market just as the recession begins.
Disinflation unfortunately looks to trickle down as Powell pointed out during the Q&A. Services inflation is clearly robust, more than offsetting disinflation in goods which reflect the dilation of supply chains and stabilization of commodity prices. I expect that divergence to continue for some time. Metals and most foods are consolidating rather than falling, while meats are falling and softs are in downtrends. All this comes too late as consumers loaded up on goods during the pandemic and have switched to services, using cash off their balance sheets to drive up prices. That’s reflected in fossil fuel futures which are trying to rally with the exception of natural gas. Until we see a sharp downtrend across the commodity complex the hopes for steep disinflation will prove fleeting.
My current positions include a small cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETFs UPRO and SPXU, all of which nets out to a small long position in equities, which I expect to exit in the coming days.