The Morning Call
5/15/23
The
Market
Technical
The S&P was
down slightly on the week, leaving the overall technical picture unchanged: the
S&P remains in a trading range, fostered by the continuing uncertainty surrounding
the odds of recession/inflation/the debt ceiling/the banking crisis and the
Fed’s policy reaction to any or all.
I do not think
that the Market goes anywhere until those issues are resolved---and as you
know, I don’t think that they will be resolved in manner positive to either the
economy or the Market.
More on Market
breadth.
https://www.zerohedge.com/markets/sp-8-2023-without-ai-it-would-be-down-2-below-3800
The long bond ended
up on the week; and like the prior two weeks, it zigged and zagged though both
DMA’s and the lower boundary of that pennant formation. Basically, performing
in tandem with the stock market---drifting aimlessly until the issues of recession/inflation/the
debt ceiling/the banking crisis are resolved.
Our only choice is to sit back and wait for the Market to figure out
what it is going to discount next.
Gold was down on
the week but remains in long, intermediate and very short-term uptrends, above
both DMA’s and most important above that former all-time high. I still want to see more follow through to
the upside before getting jiggy with GLD. But it may be the first of our
indicators to provide some directional information---suggesting lower rates, a
weaker dollar (which isn’t happening [see below]) and a declining stock market. However, I would hold fire and await more clarity.
The dollar had a
great week, pushing well above that pennant formation and finishing above its
100 DMA (if it remains there through the close today, it will revert to support).
However, it is still in a short-term downtrend and below its 200 DMA; so, there
is work to do in order to confirm any upward momentum.
Friday in the
charts.
https://www.zerohedge.com/markets/dollar-soars-debt-ceiling-doubts-monkeyhammer-markets
More charts.
Fundamental
Headlines
The
Economy
Last Week Review
There
were very few US stats last week. What
we got was slightly tilted to the negative although the primary indicators were
one positive and one neutral. Basically,
the data was a nothingburger in terms of providing directional information on
the economy. In other words, the numbers
remain mixed with no clear near-term signs of a recession and certainly no
sense of how deep it may be if it occurs at all.
As you know, I am not an optimist on this count; but to date, we are
still lacking sufficient evidence to back up a recession forecast, although
some historically accurate forward-looking indicators like the yield curve are
still predicting one. However, time is running out on the doomsayers. I am not
conceding a no recession/soft landing outcome yet but clearly my conviction remains
greatly diminished.
Note:
due to the timing of the release, one stat not included in Friday’s Morning Call
was the May consumer sentiment index which came in at 57.7 versus expectations
of 63. That clearly doesn’t bode well
for future consumer spending. That said,
it is one datapoint and we will have to see if that sentiment gets translated
into weaker sales.
The
other issue investors must deal with is, of course, inflation. And perhaps more
importantly, how the Fed perceives this problem and even more important, just
how firm is its determination to achieve its 2% target. As you know, I believe
that inflation is the red-headed stepchild of Fed priorities. Not without cause---the Fed has proven time
and again that that any sign of economic/financial/Market turmoil will result
in the immediate reversal of any tight money measures. In short, if we rely on
history, the Fed won’t likely be the instrument of 2% inflation.
Bottom
line: my best guess is that there is a recession (though I have no clue
regarding its intensity) and that at the slightest hint of disruption, the Fed
folds, leaving inflation as an ongoing problem.
Longer
term, irrespective of what happens over the next year, we are still faced with
a struggling economy growing at well below its historic secular rate.
Regrettably, years of fiscal profligacy have left us with a debt to GDP
ratio far in excess of the boundary marked by Rogoff and Reinhart as the level
at which the servicing of too much debt negatively impacts the growth rate of
the economy. And years of irresponsible monetary expansion have led to the
misallocation of resources and the mispricing of risk.
Correcting those self-inflicted wounds won’t be easy. It will take years
of fiscal and monetary restraint to do so. And that would mean less fiscal
stimulus and interest rates staying higher for longer than many now expect---which
unfortunately is not apt to happen.
The
Economy
US
The May NY Fed
manufacturing index came in at -31.8 versus expectations of -3.75.
International
March EU industrial production fell 4.1% versus
predictions of -2.5%.
April Japanese YoY
machine tool orders were down 12.7% versus estimates of -2.0%.
April German wholesale
prices were down 0.4% versus consensus of +1.0%.
Other
The
Fed
Fed official signals support for further rate
increases.
Inflation
A look ahead for
inflation.
https://blog.independent.org/2023/05/10/inflation-slowing-cpi/
Counterpoint.
https://www.capitalspectator.com/is-inflations-recent-decline-at-risk-of-stalling/
Recession
The latest BofA consumer spending
survey.
The
Debt Ceiling
The debt ceiling debate raises the
risk for ‘risk free’ bonds.
https://www.nytimes.com/2023/05/12/business/debt-ceiling-bonds-costs.html
Only the paranoid survive.
The
Banking System
US bank deposit outflows continue.
https://www.zerohedge.com/markets/us-bank-deposit-outflows-continue-small-bank-loans-collapse
Don’t forget about the insurance
companies.
https://www.ft.com/content/1aa41d97-f8a7-46d5-be71-6ec0a0cc208f
Bottom line
From Goldman’s head of hedge
fund trading.
The latest from BofA.
https://www.zerohedge.com/markets/hartnett-if-debt-ceiling-kabuki-ends-market-panic-then-fed-does-qe
Regret and optimal portfolio
allocations.
https://blogs.cfainstitute.org/investor/2023/05/12/regret-and-optimal-portfolio-allocations/
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