September 16th, 2022
Rate of pain
In our August update, we mentioned how September would be a month to focus more on the macro and wait for the micro in October when the earnings season ramps up for the last time in 2022. Central Bank rate hikes are what are in style this fall. They kicked off with the Bank of Australia raising rates 75bps on the 6th, followed by the Bank of Canada raising 75bps on the 7th, and then the now most watched central bank in the world, the ECB also raise rates 75bps on the 8th.
If you’re noticing a pattern here, stay tuned, because the Fed is likely going to follow suit on the 21st of this month and raise 75bps. How do we know this? Because they told us, well, not us but it was “leaked” to the Wall Street Journal in the early days of this month to gauge a market reaction. Which initially was mostly positive for equities, but not so much for bonds.
But…this all changed in the wee hours of the 13th when the CPI print came in at 8.3% versus the 8.1% expectations. This minor miss knocked stocks 4%+ and helped spike yields to three-month highs. But the real damage took place with the market psyche that was using the “inflation has peaked” playbook combined with the “Fed is going to pivot” kicker to justify putting risk on.
So, now we wait until next Wednesday when the FOMC raises rates (75? 100?) and algorithms comb through every word Chairman Powell says in the press conference that follows to gauge how the markets react. Fed Fund futures are currently pricing in a 66% chance of a 75bps hike and a 34% chance of a 100bps hike. The dot plots will be highly scrutinized, to put it mildly.
As we push into the final quarter of 2022, we see a year that has spiked the number of Zoloft prescriptions for investors and forced most traders to double up on their Excedrin purchases. The one question on everyone’s mind is are the June equity lows the “bottom” (SP-500 is still approximately 3% off the lows even after this week’s drubbing) And, if they are, how many market players are offside now? The chart below helps illustrate the current sentiment (bearish) and leads us to wonder if a FOMO trade will begin to develop the longer we resist those lows.
However, we also have to deal with the more aggressive quantitative tightening program that began this month. Tuning up to a $90 billion monthly balance sheet runoff versus just $65 billion previously. Incredibly, the Fed has still only shed 1.7% off its almost 9 trillion dollar sheet in 2022. Let that sink in for a bit.
The only question left for investors to ponder is can the Fed and other developed central banks navigate a soft landing or are we destined for a hard fall? We will have much more to say on this matter along with the interesting developments in the energy markets in a couple of weeks.
But let’s end on a positive note. On September 13th the CEO of travel site Expedia said the following at the Goldman Sachs technology conference:
We see the same economic news that everybody else sees. And you know, we wonder about Europe in the winter and all the things that people are talking about. But it certainly doesn’t feel like there’s a consumer recession happening right now.” – Expedia CEO Peter Ker
Now, that doesn’t mitigate the warning from Fed Ex last night, although a large chunk of that was Asia and Europe-based. But we would argue some of our outlooks comes from higher fuel costs and shrinking margins more so than demand.
So far, from all the conferences this month, we hear most CEOs say that input prices are dropping, the strong dollar is still a major headwind, and supply issues continue to drag on and on.
But, we have not heard any talk that there is a demand problem…