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The charts and themes from the previous week that inform an fascinating story in markets and investing…
1) Climbing the Wall of Fear
Inflation. Fed tightening. Falling earnings. Financial weak spot. Battle.
There’s been no scarcity of issues for buyers to fret about in latest months.
And fear they’ve, as evidenced by the longest streak of negativity that we’ve ever seen within the AAII sentiment ballot (36 weeks and counting).
The fairness market has been climbing this wall, with a 17% rally off of the October lows. Because of this, the S&P 500 is again above its 200-day transferring common for the primary time since April.
Is that this rally going to have a special ending than the earlier 4, which had been all adopted by decrease lows?
The bulk doesn’t appear to imagine so, as evidenced by this latest ballot…
2) Impending Weak spot
Chief amongst investor considerations are indicators pointing to impending weak spot within the US financial system.
The Chicago PMI (a measure of producing exercise) has solely been this low prior to now throughout recessions (final in 2020, earlier than that in 2008-09).
And the yield curve continues to fall deeper into inverted territory, with the 3-Month Treasury invoice yield now 0.83% larger than the 10-12 months Treasury bond.
Within the final 60 years, the one durations with equal or higher inversion:
-2000 (recession in 2001)
-1979-82 (recessions in 1980, 1981-82)
-1974 (recession in 1973-75)
3) Moderating the Tempo
How is the yield curve inversion deepening?
Quick-term Treasury yields (3-Month) are nonetheless trending upward whereas longer-term Treasury yields (10-12 months, 30-12 months) have been falling over the previous month.
And why is that occuring?
a) Markets are pricing in continued Fed hikes that can drive short-term yields larger.
b) Lengthy-term treasuries are getting a bid (yields falling) on the expectation of slower financial development and a decrease charge of inflation.
In a speech this week, Fed chair Powell mentioned “the time for moderating the tempo of charge will increase might come as quickly because the December assembly.”
Translation: a smaller 50 bps hike on the December 14 assembly. This may the seventh charge hike in a row and produce the Fed Funds Fee as much as a brand new vary of 4.25%-4.50%. The final time it was that top? December 2007.
That is nice information for savers, as yields on FDIC-insured financial savings accounts proceed to rise. Now you can earn 3.90% and with the upcoming charge hike we’ll quickly see yields above 4%.
4) The Case For Smaller Hikes
Why would the Fed hike 50 bps this month as an alternative of one other 75 bps?
They’re seeing progress on the inflation entrance and plenty of indicators pointing to a decrease inflation charge to come back.
-The PCE Worth Index has moved down to six%, its lowest stage since final December. The height was 7% in June.
-The Costs Paid element of ISM Manufacturing hit a 30-month low in November. Throughout the inflationary spikes of the Seventies/80s, a downturn in Costs Paid was a number one indicator of decrease inflation charges to come back (which was additionally related to US recessions in each of these durations).
-US Rents fell 1% in November, the third straight month-to-month decline. The year-over-year % enhance has now moved down for 12 consecutive months after peaking at 18.1% final November. At 4.6%, that is the smallest YoY enhance since April 2021.
-International container freight charges moved right down to their lowest ranges since November 2020 this week, 77% under peak 2021 costs.
-Fertilizer costs peaked in late March and are down 43% since, now on the lowest ranges since August 2021.
-Gasoline costs within the US have moved right down to $3.41/gallon (nationwide common), 32% under their all-time excessive in mid-June and at their lowest ranges since early February.
5) The Case For Continued Hikes
Given this backdrop, many are asking why extra hikes are obligatory in any respect.
That is the first motive: November was the twentieth consecutive month wherein the speed of inflation outpaced the expansion in hourly wages, a decline in prosperity for the American employee.
When this occurs, one thing has to provide, and to this point it’s translated into rising credit card balances and decrease financial savings charges.
The Financial savings Fee within the US has moved right down to 2.3%, the 2nd lowest stage on document with information going again to 1959 (lowest was 2.1% in July 2005).
The Fed is now acknowledging this as the intense drawback that it’s, and so they don’t wish to see it develop into a everlasting characteristic within the financial system. As such, they appear to be erring on the aspect of warning, and can danger tightening too far if it means a better diploma of certainty that the inflationary spiral will likely be damaged.
Giving the Fed extra leeway in sustaining a tightening bias is the continued power within the labor market. Jobs elevated 263k in November, the twenty third consecutive month-to-month acquire.
The US Unemployment Fee remained at 3.7%, solely 0.2% larger than the September studying (3.5%) that was tied for the bottom charge we’ve seen since 1969.
6) A Little Assist From the Cash Provide
Fee hikes usually are not the one device within the shed in terms of preventing inflation.
One of many major elements driving costs larger was the unprecedent enhance within the Cash Provide (+40% in 2020-21), which is now transferring in the other way.
The US Cash Provide (M2) has decreased 1.5% over the past 7 months, the biggest decline over a 7-month interval on document (word: M2 information goes again to 1959).
Since 1959, the US Cash Provide (M2) has gone up each yr, with the 0.3% enhance in 1994 the smallest and the 25% enhance in 2020 the biggest.
2022 is on tempo to be the primary calendar yr wherein the Cash Provide has fallen within the final 60+ years, down 0.3% YTD.
7) Tesla Flipping Is Over
Rising rates of interest, elevated manufacturing, and the contraction within the cash provide is bringing to an finish one of many strangest issues we’ve ever seen in markets: automotive flipping.
You learn that appropriately. The demand for vehicles, notably sizzling EVs like Tesla, exceeded provide by such a big extent that individuals had been actually capable of flip their new/used vehicles for a revenue.
This was a reversal of the age-old precept wherein a automotive was mentioned to lose a sure % of its worth the minute you drove it off a vendor’s lot.
We now appear to be reverting again to the outdated regular, and at a fast tempo.
The common worth of a used Tesla is down practically 15% over the past 90 days, $11.5k decrease than the height in July.
8) An Attention-grabbing Divergence
Power has been far and away the most effective performing sector in 2022, pushed by hovering revenues and earnings.
Usually, there’s a excessive correlation between the path of Power shares and Crude Oil. However over the previous two months, we’ve seen an fascinating divergence, with Power shares transferring larger whereas Crude Oil has traded sideways.
9) Oscillating Volatility
The Volatility Index ($VIX) closed under 20 this week for the primary time since August. It’s been a yr of oscillation for the $VIX with temporary durations of calm adopted by a return to larger volatility with a median stage of 25.9 (historic common is nineteen.7).
With information beginning in 1990, the one years with a better common $VIX than this yr: 2008, 2009, 2020, and 2002.
10) The Housing Slowdown Continues
US Residence costs fell in September for the third consecutive month. The three-month decline of -2.2% is the biggest 3-month drop since 2009.
When the final housing bubble peaked in Feb 2007, costs fell 26% nationally.
The identical decline immediately would solely carry residence costs again to September 2020 ranges. That’s a mirrored image of how a lot US residence costs went up within the final section of the present bubble, a 40% enhance in simply two years.
The speed of US residence worth appreciation continues to gradual, up 10.6% YoY nationally in line with the Case Shiller Index. That is lowest YoY enhance since December 2020 however is just as of September, lacking the final 2 months.
Actual-time information reveals YoY appreciation has moved right down to 2%, and can possible go unfavourable sooner or later within the subsequent few months.
Each metropolis within the Case-Shiller 20-city index noticed a decline in residence costs throughout August and September. The final time all 20 cities had been down two months in a row was in December 2008/January 2009. San Francisco is exhibiting the biggest decline in residence costs to this point, -10.5% from its peak in Could.
Why are costs falling?
The primary issue is a scarcity of affordability.
The median American family would want to spend over 46% of their revenue to afford funds on a median-priced residence within the US, the best % on document with information going again to 2006.
And that’s it for this week.
Have an awesome week everybody!
-Charlie
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