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Mon 9/25 Week Preview
Lots of data, Friday shutdown?
Markets: (6:25am PST)
Equity down $SPX (-12bp) and $NDX (-16bp), with a choppy open. Equity markets last week -- $SPX (-4.02%), $NDX (-3.62%) -- all lower during an intense week of central bank events. Among key events was the Fed's "Hawkish Hold" (5.50%), Bank of England's surprise hold (5.25%), and BoJ's in-line unch (-0.10%) . The global monetary cycle is near its peak and markets are digesting a world in which rates stay higher for longer (note: we think it doesn't).
With a looming Government shutdown, we expect hedging activity to increase:
Commodities last week saw oil prices slightly negative $WTI (-1.11%), $Brent (-0.73%), with industrial metals like Copper (-2.18%) and Aluminum (2.31%) mixed, and Gold down marginally (-0.50%).
In the US rates space, the US 10yr briefly crossed above 4.50% -- the highest since 2007. Real rates, which are nominal yields - inflation expectations (US 10yr Breakevens), remain the primary concern. Economic theory points to the neutrality of money (simplistically: the level of interest doesn't matter in the long run), but we do worry that elevated real rates across the term structure points to tightness that can impact economic growth in a variety of ways: higher borrowing costs, reduced consumption via increased savings and negative wealth effect, lower asset prices (driving negative wealth effect), higher dollar (decreases US exports), debt burden, and business confidence.
This chart shows the SF Fed's Proxy Implied Policy Rate vs. the NY Fed's R-star estimate for the quarter.
Events we are covering:
Monday: German IFO data (85.7)
Tuesday: US Consumer Confidence, US New Home Sales
Wednesday: US Durable Goods
Thursday: US GDP Revision, German CPI
Friday: US PCE, Japan CPI / New Housing / Retail Sales / Industrial Production, Eurozone HICP
Saturday: China PMI
We expect US data to come in soft through the week (more on that below).
Commentary & Research:
Upgrades energy to overweight due to a positive macro-outlook, attractive valuations, and bullish indicators like potential OPEC supply addition. JPM is optimistic on gold & silver due to increased central bank buying and geopolitical factors.
Monitoring China's Golden Week holiday (Sep 29 - Oct 6) as a demand indicator. Preliminary data suggests improvement, but the translation to real demand is uncertain. Notes growth in Asian tech exports and surge in China's auto sector.
Systematic strategies are delevering after recent market dips, likely leading to more selling flows; factors like momentum shifts and dealer hedging intensify movements.
Sees diminishing pricing power as a headwind to corporate earnings.
Says we are in the middle of the worst seasonal period of the year. Since 1928, the last 10 out of 11 days in September are negative. CTA trigger levels of $4353.30 on SPX -- GS estimates at least -$17b to sell. Dealers -- GS estimates we are in negative gamma period, where dealers get significantly more short if we sell off into month end. Corporate blackout period, about 80% of corporates are in their blackout period; Nov-Dec is the best period for execution.
Cash is yielding more than stocks (GS), 0DTE option activity continues to move higher (OCC), liquidity is boosting large cap vs. small cap, GS highlights energy is underweight. Brent crude continues to shift higher; Capital markets (IPOs) to resume; and Financial conditions are tightening, which should is needed to cool the economy (sees risk of economic upside).
Shutdown to be a drag to growth in Q4 if persists for more than a few weeks; should limit the risk of bonds underperforming vs stocks; sees a material drag on PCE inflation in Q4 even without shutdown; Growth headwinds in Q4 to challenge the growth narrative.
Economic surprises and Fed guidance drive market positioning in rates. We expect data in the US to trend lower through the rest of the year as consumer spending marginally declines due to (1) higher energy prices, (2) UAW strikes and Gov shutdown potentially adding to unemployment, (3) restart of student loan payments in October, and (4) a pickup in unemployment driven by lower equity prices.
Here's a simple diagram that outlines our thinking:
Notable Upgrades & Initiate Buys: KMX, MSFT, SEE, STLD, ZGN, BE, DTC, PLUG
Notable Downgrades & initial Sells: BHP, FL, NKE, QSI, SLGC, URBN, BTE, GLNG, ALEX, CART, TTGT, UPST, WRBY, ZD
Growth & Employment: Trend-plus growth is evident, but with tighter credit standards. August showcased solid job numbers at 187K, higher than the 3-month moving average (3MMA) of 150K. The unemployment rate rests at 3.8%, up slightly from a year ago, which is indicative of increased labor force participation (now at 62.8% from 62.3% a year ago). Hourly earnings have grown modestly. Based on these indicators, the expectation is for the Federal Reserve to pause rate adjustments in September.
Inflation: Current signals indicate moderating inflation. The Core PCE deflator for July was recorded at 2.9% for the last 3 months and 4.2% for the last year. However, achieving the 2% target remains a challenge, suggesting rates might remain higher for longer.
Federal Reserve Stance: Under Powell, the Fed maintains a restrictive policy to combat inflation, continuing its rate-raising policy in July. Balance sheet reduction persists. A pause is anticipated for both September and November.
Global Markets: The Russia-Ukraine conflict escalates, influencing energy prices and consequently growth in Europe and the UK. China's economic opening has been less than expected, relieving pressure on commodity prices.
Japan: GDP for 2Q exceeds expectations. The Yen has seen fluctuations based on decisions from the Bank of Japan. News headlines highlight the demographic and financial challenges Japan faces.
Russia-Ukraine: Conflict persists, causing a spike in Russia's interest rates due to a plunging ruble.
China: Economic recovery remains fragile, evidenced by recent headlines from Barron's and WSJ. Additionally, currency and debt concerns are raised in the region.
Eurozone: Economic indicators lean towards a downturn. Forecasts for 2023 and 2024 remain modest. Several headlines emphasize challenges in the Eurozone, especially concerning manufacturing and German's economy.
UK: Economic forecasts suggest modest growth. Interest rates stand at 5.25%, with the economy impacted by weather conditions and industrial actions.
Canada: Growth forecasts for 2023 stand at +1.3%. The CPI rate hovers around 3.8% for 2023. The central bank suggests potential restrictive policies in the future.
Long-term U.S. Outlook:
The Biden budget does not anticipate significant long-term gains, with growth expectations declining. This situation presents challenges with deficit financing. Options for resolution include increased taxes, inflation, and interest rates. Recent headlines suggest financial challenges for the U.S., including potential credit rating downgrades and increasing debt concerns.
Leading indicators suggest mixed outcomes for growth. Specific markers like ISM orders and consumer sentiments provide varied readings. Inflation readings suggest a mild moderation. Recent weekly news has indicated fluctuations in housing, global CPIs, and central bank policies. Market prices for commodities and indices, such as oil, gold, wheat, and equities, have displayed mixed trends over the last month.
If you have any questions, comments, or feedback, please feel free to contact me directly.