There’s no shortage of volatility in the markets this week and today we’re seeing the negative side of that, with Europe down around 1% and US futures not far behind.
The old adage that markets hate uncertainty couldn’t be more true and it’s going toe to toe with another well-known force, investors’ love of dips. It’s been so beneficial over the years, backed by endless central bank cash, so you can’t blame them. But on this occasion, they may be swimming against the tide as the downside risks are potentially severe.
It’s was encouraging over the weekend to hear that cases appear more modest, which drew dip buyers in on Monday. But huge uncertainty still remains and we’re seeing that in action today, as Moderna Chief Executive Stéphane Bancel warned current vaccines will be far less effective against Omicron.
This whipsaw price action could become a regular feature over the next couple of weeks as information on the variant trickles out and we get a much better understanding of what we’re dealing with. For now, markets will remain very sensitive to indications that vaccines may not protect us this winter as much as we hoped.
This brings us to central banks and what they intend to do if countries are forced to impose tight restrictions and lockdowns. It’s always assumed that they’ll just turn the taps on, drown the market in liquidity and save the day. But throughout the experiment of the last decade or so, they’ve never had to contend with high inflation, rather the theoretical risk of it.
Are they really going to be so keen to flood us with QE this time around? Or is the best we can hope for that they don’t raise rates for a few months and pause the tightening cycle before it’s really begun. And at what cost given that lockdowns may exacerbate the supply-driven inflationary pressures and give central banks a worse headache. That could be a drag for equity markets in the near term.
Of course, this is all hypothetical at this point and a bit of good news on the vaccine front would quickly get investors back on board and allow central banks to proceed with cautious tightening. But the early signs from the actual experts suggest there is something to worry about with Omicron, which may be a shock to the system this winter.
Euro buoyed by higher inflation data but shouldn’t get carried away
The euro is rallying strongly after eurozone inflation soared to 4.9% in November – a record high – led by higher energy prices, while the core reading also blew past expectations rising to 2.6%. The single currency had been on the rise all morning after the French data surpassed expectations, as did Germany and Spain on Monday. Ultimately though, I don’t think it changes much as far as the ECB is concerned. Euro area inflation will ease after the turn of the year and as a result the central bank is not among those that will be feeling the pressure at this stage.
Lira hit again as economy grows slower than expected
The lira is getting hit once again after reports that the CBRT Executive Director for Markets has left their post. The dollar broke back above 13 against the lira after the reports and remains above there despite paring some of those gains, which also came after the country reported growth of 7.4% in the third quarter, a little shy of expectations.
The currency remains extremely vulnerable to further losses as President Erdogan continues to fiercely oppose higher rates and the central bank shows no sign of changing its approach, rather its staff.
Bitcoin seeing strong support despite market risk aversion
Bitcoin bounced back strongly on Monday, along with other risk assets, but failed to break back above USD 60,000 and has come under pressure once again today. What’s interesting though is it appears to have found support around USD 56,000 again, ahead of last week’s lows which may suggest we’re seeing a flurry of bargain hunters hoping to capitalise on the recent 20%+ dip.
It seems premature given the wild swings we’re seeing in sentiment at the moment and risks to the downside that Omicron poses. But bitcoin has performed well since the start of the pandemic and perhaps there’s a view that should central banks be forced to step in, bitcoin could benefit once more. I guess we’ll see if that turns out to be the case.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/
M2 and Nominal GDP Update: still growing rapidly
I am fascinated by the fact that these days hardly anyone is talking about the very rapid growth in both M2 and nominal GDP. Both suggest that inflation…
Chart #9 compares the growth of the personal consumption deflators for services and durable goods. Of interest is the explosive growth in durable goods prices.
A Market Green Light or No?
Was “selling the rumor” responsible for the recent weakness? … how are traders sizing up Wednesday’s Fed release? … what’s important in today’s…
Was “selling the rumor” responsible for the recent weakness? … how are traders sizing up Wednesday’s Fed release? … what’s important in today’s market
Wall Street traders often front-run major events that are likely to move the markets.
It’s the old adage of “buy the rumor, sell the news” (though in reverse).
Is that what’s been happening with the market weakness over the last few weeks? Have traders been bailing on stocks based on the rumor of what the Fed will do, preparing to buy back stocks after the fact?
Our technical experts, John Jagerson and Wade Hansen of Strategic Trader believe that’s what’s been happening.
From their Wednesday update:
Traders like to be ahead of the curve by both buying before the news is confirmed and then taking their profits off the table once the news is official.
The opposite phenomenon frequently occurs as well; traders sell their stocks before the news is confirmed and then buy back into their previous positions once the news is official.
While there isn’t an old saying that goes, “Sell the rumor; buy the news,” we think that is what has been happening in the stock market.
Traders have been worried for the past two weeks that the Federal Open Market Committee (FOMC) might signal the following things in today’s Monetary Policy statement:
- More than four rate hikes this year…
- An individual rate hike larger than a 0.25%…
- An accelerated tapering of its bond-purchase program…
- And a dramatic reduction of its $9-trillion balance sheet this year.
This worry has caused traders to sell into the rumor… or the worry, in this case.
As you know, the Federal Reserve released its policy statement on Wednesday.
How did it impact these fears? And what does that mean for a market rebound?
Let’s find out.
***Is Wall Street “buying” the news now?
For newer readers, John and Wade are the analysts behind Strategic Trader. This premier trading service combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.
In their Wednesday update, they dove into the details of the Fed’s policy statement. They identified language that speaks directly to the fears that have been weighing on Wall Street traders.
From the update:
The FOMC just released its statement, and here’s what it said:
- It will likely start raising rates in March.
- “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
- It is not planning on more than four rate hikes in 2022, but it’s not taking the option off the table.
- “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
- It will be accelerating its tapering… slightly.
- “The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.”
- It has no plans to start dramatically reducing its balance sheet.
- “The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”
John and Wade sum up by saying they believe that this statement should ease Wall Street’s worries.
Now, that doesn’t automatically mean these traders will push stocks higher. Rather, it just removes this overhang from the market. But traders are still highly sensitive to economic data and earnings.
***On that note, we’re beginning to see a pattern of Wall Street shrugging off strong earnings, focusing on weaker guidance
On Wednesday, this market darling reported strong fourth-quarter results that included a record number of vehicle deliveries.
Adjusted earnings came in at $2.52 per share versus the forecast of $2.36 per share. Revenue rose 65% year over year in the quarter, while automotive revenue totaled $15.97 billion, up 71%.
Great quarter, right? Deserving of a nice pop in the share price?
Nope. Wall Street decided to focus on the potential for problems in the months ahead.
Tesla sold off 5% after hours on Wednesday. And the pressure continued yesterday, with the stock ending the day down 12%.
Here’s CityIndex explaining why:
Tesla warned its ability to meet its ambitious target to grow deliveries this year will depend on the availability of equipment, maintaining operational efficiency and ‘stability in the supply chain’.
It is that last factor that markets fear the most.
Tesla has so far proved to be far more resilient to the supply constraints hampering the global automotive market compared to its rivals, but the company is not immune and warned supply chain issues are ‘likely to continue through 2022’.
***It was similar with Netflix’s earnings last week
The streaming giant beat on its bottom line and was in-line with revenue expectations. But shares plummeted in after-hours trading based on fears of slowing subscriber growth.
From The New York Times:
Netflix added 8.3 million subscribers in the fourth quarter, raising its worldwide subscriber base to 222 million, but the company said on Thursday that it expected growth to slow in the opening months of 2022.
That news, in the company’s earnings release, prompted the stock to drop nearly 20 percent in after-hours trading.
Netflix ended up falling more than 30% over ensuing trading sessions and remains down 26% as I write.
Now, compare Tesla and Netflix to Apple, which released earnings yesterday after the bell.
The world’s most valuable company smashed its revenue record, also topping earnings of $30 billion for the first time.
Most importantly, CEO Tim Cook said that the supply chain challenges are improving. Though Apple hasn’t given formal guidance since the beginning of the pandemic, here were Cook’s comments:
What we expect for the March quarter is solid year-over-year revenue growth.
And we expect supply constraints in the March quarter to be less than they were in the December quarter.
Bottom-line, Apple’s growth story remains intact. So, its share price is benefitting, up 6% as I write.
This all points toward a reality of today’s market…
What matters now is growth.
Can a company continue to grow despite inflation, a rising rate environment, and the threat of a slowing economy?
If so, Wall Street will reward it. If not, watch out.
***Looking at growth on a macro level, we received encouraging GDP news yesterday
Gross Domestic Product grew at a 6.9% annualized pace in the fourth quarter. That’s much higher than the 5.5% estimate.
Plus, consumer spending, which makes up more than two-thirds of GDP, climbed 3.3% for the quarter.
So, there are positives here (despite today’s massive inflation number…but that’s no surprise anymore).
Just make sure any trade you’re considering is similarly rooted in fundamental strength – which means growth.
Returning to John and Wade, they believe some short-term bullish trades are setting up.
They’re not pulling the trigger yet. Instead, they’re giving the market a few more days to digest recent news. But they’re feeling cautiously bullish.
I’ll give them the final word:
What matters most is not whether the Fed will raise the overnight rate in March and then again in the second quarter – traders are already pricing that in. What is important is whether the underlying fundamentals are still positive…
We don’t want to fall into the trap of ignoring the bad news in favor of the good, which is why we are recommending patience before adding more risk to the portfolio.
However, it’s essential to be aware of the solid prospects the market still has in the near term to rally and provide easy profits.
So, for now, we don’t recommend making any changes to our trades. Still, we think the likelihood of new opportunities and some profitable exits over the next few days is high.
Have a good evening,
All The Curves, From Supply To Demand To Yield
Technically speaking, the rebound from the 2020 recession wasn’t strictly a supply shock. That was a huge part of it, no doubt, but a near-concurrent…
Technically speaking, the rebound from the 2020 recession wasn’t strictly a supply shock. That was a huge part of it, no doubt, but a near-concurrent demand shock, if you will, also materialized. The combination of the two left the public bewildered, believing it an actual inflationary impasse which could only be further passed on into this year.
Consumer prices did rise, of course, and they still are rising, though not because of (monetary) inflation. Rather, the first half of 2021 was an anomaly rather easily explained by simple, small “e” economics.
The first part of it, supply, that was all the impediments imposed by both non-economic (lockdowns, reconfiguring product lines) and economic (money and credit) factors which left the supply curve far more inelastic. This simply means suppliers and producers (along with shippers) are less responsive to changes in demand.
Sketching supply inelasticity out like any middle-schooler might upon their very first introduction to economics, the basics of it would look something like this:
It must be noted that these changes were applied globally and not just to or in the United States. Various national parts of the global economy were affected by them differently and to different degrees, by and large this was a universal phenomenon.
What then followed the evolution of supply inelasticity was the demand “shock” in the form of various government interventions; again, not just domestic US, all over the world. Those originating from the American government were the most pronounced, therefore created the biggest bounce to the right for the demand curve. Others followed to lesser extents.
The combined result is somewhat surprising considering how much the economy has been described, repeatedly, especially in America, as red hot and dangerously overheating. On the contrary, supply inelasticity means that most of the effect is illusory in terms of price whereas overall output doesn’t necessarily increase much at all.
Though these drawings are admittedly cartoonish, they aren’t very far off the actual data. Look at GDP or Industrial Production all over the world. Prices went up, especially here, but output not so much.
This has been excused as difficulties sourcing raw materials and whatnot, but that’s baked right into the inelasticity of the supply curve! And while others blame a purported labor shortage, it’s far more easily and readily explained by producers who aren’t producing nearly as much therefore aren’t as willing to pay market clearing wages (or even hire more workers).
Either way, as the supply curve shifts back more elastic, prices begin to come down as output actually rises…only if all things are equal (ceteris paribus). We know, however, they are not equal.
Even as the supply side twists slowly back toward its long run stable state, unless there’s (actual) monetary expansion behind the demand shift, demand won’t stay toward the right, either. Instead, it’s going to migrate back to the left toward its own long run stable state.
Depending upon other factors, output might rise again but much more slowly or in more limited fashion than it otherwise could have, all the while prices descend in the direction of their own starting equilibrium (assuming there is such a thing, or that there is one which could be stable).
Viola, there’s yesterday’s generally ugly GDP figures along with the PCE numbers (monthly) published today. The general supply curve is becoming less elastic (pumping out massive inventory into the supply chain) while the effect of the previous government interventions (including Uncle Sam) fade further and further into the past.
Prices haven’t yet backed off, though they have started to exhibit the general tendency toward deceleration (not all at once, therefore three camel humps that I’m told can’t describe a camel at all). In some places, though, we’re seeing perhaps the beginning stages of outright reversion (like China’s producer prices or US services prices).
The biggest macro problem is that the private economy’s actual state is obscured underneath this “inflation.” Labor shortage, red hot, etc. Because the mainstream treats each and every outbreak of consumer price acceleration as the same thing, especially those times when it is due to something other than money (true inflation), it can only result in mass confusion.
In fact, at some point, the bottleneck of forced price increases actually inhibits the demand curve staying to the right; prices rise faster than the economy’s ability to maintain even the same levels of demand (because it’s not caused by monetary expansion). Thus, what we saw in yesterday’s GDP along with today’s Personal Income and particularly consumer spending:
Even though the labor market has likewise struggled to recover (consist with the low changes in output) despite the artificially-fueled spendy frenzy, incomes have been rising though nowhere near enough to absorb the equally artificial increase in the general price level.
As such, private economy labor falls further and further behind (fails to catch all the way back up) exacerbating the demand curve shift back left.
Economists (capital “E”), however, they all believe (without evidence, only regressions) such interventions as last year’s massive helicopters produce lasting effects – a more durable perhaps permanent move in the (aggregate) demand curve out to the right. Furthermore, after the extreme price changes last year, most (Larry Summers!) are more worried that the curve had been pushed too far to the right and will remain too far out that way.
This group now includes the FOMC whose members then add psychological hokum to their even more primitive curve graphics thereby manufacturing the hawkish double-taper, triple-maybe-quadruple rate hikes for 2022 all the while real markets reject all these things.
True economics, the lack of money impulse, and now more upon more data all bely these mainstream interpretations. It’s only a “growth scare” in the context of merely assuming those first, that Economists and central bankers employing standard DSGE assumptions have anything worthwhile to say about the situation.
Rather than “growth scare”, the actual situation appears to be nothing more than the other side of last year’s double anomalies. One supply. One demand. None monetary.
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