The Morning Call
10/23/23
The
Market
Technical
The S&P got
smacked around pretty hard last week.
Part of it was just the poor headlines (war, government disfunction, etc.)
and part of it was a shift in the operative market narrative from focusing on
Fed policy to the pin action in the long bond.
Many would assume that those two matters are the same. However, an indication that they are not is
that on Thursday following a dovish Powell speech, bonds got whacked. In other words, it appears that bond
investors care less about how the Fed manages the short end of the curve and
more about the economic factors playing on the long end.
In the present instance,
I am assuming that means fear of a continuing runaway fiscal policy and its
impact on interest rates is weighing more heavily on bond investors than any
action by the Fed. Making matters worse,
war (as in Ukraine and Israel) is an expensive proposition and historically
quite inflationary (not good for bond prices).
As to the pin
action itself, the S&P made a third lower high, then ended the week below its
200 DMA (if it remains there through the close on Wednesday, it will reset to
resistance) and is now a short hair away from the 23.6% Fibonacci retracement
level (~4200). If that can’t hold, the
next stop appears to be ~3817. Let’s
hope current levels hold. But until we
know, I wouldn’t step in front of this train.
This takes balls:
BofA says get ready for a rally.
Deep fear.
https://www.zerohedge.com/the-market-ear/deep-fear
The long Treasury mirrored
the S&P last week. As I suggested
above, bond investors appear to have decided that Fed policy is less important
in the long run than fiscal policy---and geopolitics isn’t helping. TLT continues to make lower highs and lower
lows; so the assumption has to be that it will continue to do so until it doesn’t. And we have no way of knowing that. The sidelines are the best place to be.
Despite plunging
bond prices (rising yields), GLD had a spectacular week, pushing through both
its 100 and 200 DMA and closing near its all-time high. Concerns about inflation (soaring fiscal
debt) and war usually result in that kind of price action. Several technicians that I respect a great
deal believe that the current assault on the all time high will be successful. However, if I wanted to own gold, I would
wait until it confirms its challenge of its all-time high before stepping in.
Friday in the
charts.
Fundamental
Headlines
The
Economy
Last Week Review
US data
last week was quite upbeat as were the primary indicators (three positive, one
neutral, one negative). So, the back and
forth in the data and its interpretation continues. Leaving us back where we started---unsure of
the likelihood that inflation is in the rear view mirror or whether we get a
soft, no or hard landing. On that score,
Powell delivered what was considered a dovish speech i.e. the inflation battle
has been won. Although I would argue
that it could just as easily be interpreted that the Fed once again ‘chickened
out’.
That
said, the generally accepted economic scenario appears to be changing driven by
a plunging bond market. As I note above,
investors’ focus seems to have shifted from Fed policy to fiscal policy which
is to say the concern is less about ‘higher for longer’ and more about
irresponsible government spending driving rates higher.
Add
potential war in the Middle East to that narrative and the result is a goosy
market.
Bottom
line: As you know, I have suspended my recession forecast. Given the erratic data flow, I see no reason
to change that. But the real outlook is
‘I don’t have a clue’. That said,
history tells us that when the yield curve un-inverts, as it has just done,
recession is not far behind.
Weekly
recession alert leading economic index.
Economists
reduce recession odds.
On
the other hand, subprime auto loan delinquencies soar.
https://www.zerohedge.com/markets/subprime-auto-loan-delinquency-erupts-reaching-highest-rate-record
I
am leaving my ‘Fed chickens out’ call in place---simply because it always does
and it may be doing so now.
Longer term, we are faced with an economy growing at well below its
historic secular rate and a base rate of inflation above 2%.
Correcting that 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
International
Other
Recession
The
broken housing market.
https://disciplinefunds.com/2023/10/18/chart-of-the-week-the-broken-housing-market-that-isnt-broken/
Geopolitics
Prolonged
Israel/Hamas conflict adds economic havoc to human toll.
https://www.nytimes.com/2023/10/20/business/israel-economy-war-gaza-hamas.html
The Bond Market
I don’t often
disagree with Lance Roberts, but in this case I do. His case for lower rates is that Japan has a
higher debt/GDP ratio than the US and its rates are much lower. However, the difference is that most of the
Japanese debt is owned by Japanese, who won’t sell. The US debt is owned by multiple non-US
governments/institutions which will sell.
Surging
Deficits - The Bear's New Meme - RIA (realinvestmentadvice.com)
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