East Asia Gets Mowed Down By King Dollar While Wheat, Meat And Silver Traders Refuse to Help The American Consumer — What Fixed Income, Currency, Commodity And Equity Markets Are Telling Us
The Fed wants disinflation now and isn’t getting it as commodity traders keep prices stable and American workers keep the pressure for higher compensation on firms. About the only thing working in the Fed’s favor is the action in currency markets, where disinflation in import prices helps anyone wealthy enough to afford luxury imports. The rest of America is witnessing stagflation as wages lose out to inflation and bottlenecks keep retailers on edge. Accordingly equities markets have shrugged off the summer bear market rally and are ready to plumb the lows of June. The volatility risk premium points to a market fall over the next few days, while my technical reading of key stocks in the S&P 500 is bearish. There are several negative factors across global asset classes. Gold is trading as a risk-off asset. 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 fall over the next few days.
The pass-through effects of the great inflation have room to run and will decimate any wage gains made by workers, but the greater worry is whether the disinflation is coming anytime soon. The action in the bond market suggests it’s coming but too gradually to make a difference to risk assets like equities. Bonds are headed lower and the inversion of the yield curve will remain at 35-40bps or slowly flatten out with long yields catching up by 2023. This is based not just on the charts and the economic newsflow but the trend in bond market volatility, which has yet to break down even as short rates make new lows. I see another run up in the MOVE index that will devastate equities just as worries about earnings season amp up.
Equity volatility has remained above average but far from capitulation or panic highs, averaging in the mid-20s. This will stay elevated regardless of whether the S&P consolidates, rallies or falls over the next week, with all risk towards rocketing volatility. The reason is the growing debate between those who trumpet high-single-digit earnings growth in 2023 vs. those calling for negative growth as recession grows more likely. While the economic data has yet to indicate recession the action in commodities and the $US suggest earnings will compress for reasons CEOs can do nothing about.
Commodities have been mixed and that’s not what companies and the Fed need to ease America to a soft landing with strong disinflation. Copper’s failure to break prior highs is a good sign for disinflation, as is today’s breakdown in gold. But other precious and industrial metals are building on rallies, which limits disinflation in the near-term. Ags are also rallying modestly, meats consolidating while softs trending lower, so the retail consumer isn’t going to get much relief in the near-term. And while oil is close to collapsing out of a large trading range, natural gas is rallying back to its bull run and gasoline futures are rallying as well. This suggests that fossil-fuel based prices will continue to be troublesome and the pass-through effects from the industrial sector to consumers has a ways to play out.
The fundamentals for interest rates remain strong until the American consumer gives way. We will likely see that in a declining housing and rental market, which will be foreseen by falling equities as the bear market goes full throttle in the second half of September.
My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and SPXU, all of which still nets out to a meaningful short position in equities.