Tom Essaye Quoted in Market Watch on November 25th, 2022

U.S. bond market holds steady in shortened post-Thanksgiving session

“Looking at the curve, the 10s-2s yield curve spread remained near a multidecade low of nearly minus-80 basis points. That deep of an inversion suggests that the Fed’s current policy and expected path of future policy are far too restrictive for the state of the economy and growth expectations, which will almost certainly end in a recession — and potentially a severe one given the scope of the current inversions across the Treasury yield curve,” said Tom Essaye, editor of Sevens Report Research, in a note. Click here to read the full article. 

Was Last Week’s CPI Report A Bullish Gamechanger?

What’s in Today’s Report:

  • Was Last Week’s CPI A Bullish Gamechanger?
  • Weekly Market Preview:  Can Yields Keep Falling?
  • Weekly Economic Cheat Sheet:  More Key Inflation Readings This Week

Futures are modestly lower following some hawkish Fed comments and as investors digest last week’s big rally.

Fed Governor Waller made comments on Sunday that the Fed still has “a ways to go” before ending rate hikes, which is sapping some of last week’s soft CPI enthusiasm.

Positively, China continued progress towards abandoning “Zero COVID” and announced a stimulus plan for supporting the residential real estate market.

Today there are no notable economic reports and only one Fed speaker, Williams at 6:30 p.m. ET, but that won’t impact today’s trading.  So, we’d expect digestion of last week’s gains.  Politically, the Republican’s are still expected to win the House, but it will be close.  If Democrats look like they may win the House, that will likely weigh on markets as investors want a split government.

FOMC Meeting Preview

What’s in Today’s Report:

  • FOMC Preview
  • Chart: 3,900 Is a Key Level For the S&P 500

U.S. futures and global stocks are rallying today amid reports that China is forming a “reopening committee” as part of a new push to ease Covid restrictions (however China’s foreign ministry has denied the rumors).

The RBA raised rates by 25 bp overnight, meeting estimates while the U.K.’s Manufacturing PMI was slightly better than feared at 46.2 vs. (E) 45.8.

Today, the focus will be on economic data early with the ISM Manufacturing Index (E: 50.0) and JOLTS (E: 9.875M) both due out shortly after the opening bell. But market reactions to the data are likely to be limited as the November FOMC meeting gets underway.

Earnings will remain in focus today with UBER (-$0.17), PFE ($1.47), BP ($1.94), and SYY ($0.99) reporting ahead of the bell, while AMD ($0.55) and ABNB ($1.46) will release results after the bell.

Bottom line, the combination of mostly favorable market news flow this morning, the calendar, and trader positioning into the Fed are all contributing to this morning’s pre-market gains, however, “Fed paralysis” is likely to set in today and into tomorrow’s morning session as investors await the latest Fed decision.

How (and Why) We Calculate Real Interest Rates

What’s in Today’s Report:

  • How (and Why) We Calculate Real Interest Rates

Futures are moderately lower following a disappointing night of earnings.

Thursday night was the first bad night of earnings as SNAP and WHR both posted underwhelming results, while numerous European companies also missed estimates.

Economically, the Japanese CPI ran hot (3.0% vs. (E) 2.9%), like virtually every other inflation indicator this week.

Today there are no economic reports and just one Fed speaker, Williams (9:10 a.m. ET), but he shouldn’t move markets.

Instead, the focus will continue to shift toward earnings and the markets needs some good results to rally today.  Reports we’re watching today include: VZ ($1.28), AXP ($2.38), SLB ($0.55), HCA ($3.89).

Economic Breaker Panel

What’s in Today’s Report:

  • Economic Breaker Panel (October Edition)
  • Oil Update and EIA Analysis

Futures are slightly lower following a night of mixed earnings results and yet another firm inflation report.

TSLA missed on revenue and production targets and the stock fell –5% after hours, although overall earnings reports were more mixed than negative overnight.

German PPI was the latest global inflation indicator to run hotter than estimates (2.3% vs. (E) 1.5%) reinforcing that global inflation is proving “sticky.”

Today’s focus will be on economic data and the key reports are (in order of importance): Philly Fed (-5.0), Jobless Claims (E: 235K), and Existing Home Sales (E: 4.695M).  If we can see a moderation in the data (especially in the price indices in Philly Fed) then stocks can rally.  We also get numerous Fed speakers including: Harker (12:00 p.m. ET), Jefferson (1:30 p.m. ET), Cook (1:45 p.m. ET), and Bowman (2:05 p.m. ET) but none of them should move markets.

Finally, earnings season rolls on although the critically important results really increase next week.  Some reports we’re watching today include:  AAL ($0.54), SNAP ($0.00), and WHR ($5.59).

Staying Focused on the True Cause of Market Volatility

What’s in Today’s Report:

  • Staying Focused on the True Cause of Market Volatility
  • Weekly Market Preview:  Can Global Yields Drop?
  • Weekly Economic Cheat Sheet:  How strong is US Growth?

Futures are moderately higher after new UK Chancellor of the Exchequer Jeremy Hunt abandoned virtually all of the tax cut proposals in PM Truss’s spending/stimulus plan.

Hunt’s announcement of the abandoning of tax cuts and a review in April of the energy subsidies are easing market concerns and pushing the Pound higher and global yields lower.

Outside of the UK fiscal news it was a mostly quiet weekend.

Today focus will be on the Empire Manufacturing Survey (E: -2.5) which is our first look at October data, and markets will want to see moderation in the headline and a continued drop in the price index, and if that occurs stocks can extend the rebound.

On the earnings front, activity ramps up later in the week but some results we’re watching today include:  BAC ($0.79), SCHW ($1.05), BK ($1.10).

Have We Reached Peak Hawkishness?

What’s in Today’s Report:

  • Are We At Peak Hawkishness?
  • Putting the Pullback in 2-Yr Yields in Perspective: Chart
  • JOLTS Fall Sharply

Stock futures are down roughly 1% this morning as investors digest the sizeable week-to-date gains amid rebounds in Treasury yields and the dollar.

Looking overseas, the Reserve Bank of New Zealand raised rates 50 bps overnight, meeting consensus expectations while the Eurozone Composite PMI came in at 48.1 vs. (E) 48.2.

Today, the focus will be on economic data early with the ADP Employment Report (E: 200K) due out before the bell as well as data on International Trade in Goods and Services (E: -$68.0B), and then the ISM Services Index (E: 56.0).

There is also one Fed official scheduled to speak in the afternoon: Bostic  (4:00 p.m. ET).

Bottom line, most of this week’s gains have been a function of renewed “peak-hawkishness” hopes however if economic data comes in stronger than expected and we see yields turn back higher and the dollar resume its rally, then we could see stocks give back some of this week’s rally which has admittedly occurred at an unsustainable pace.

Understanding What’s Happening in the UK and with the BOE (This Matters to U.S. Stocks and Bonds)

What’s in Today’s Report:

  • Understanding What’s Happening in the UK and with the BOE (This Matters to U.S. Stocks and Bonds)
  • What the Nordstream Pipeline Sabotage Means for Energy Markets

Futures are down close to 1% on digestion of Monday’s bounce and as UK PM Truss defended her spending plan.

UK Prime Minister Truss doubled down on her tax cut and spending package, calling it the “right plan.”  The market still disagrees, however, and the Pound is down –0.5% and 10-year GILT yields are up 14 bps on the comments.

Economically the only notable report was EU Economic Sentiment which missed estimates (93.7 vs. (E) 96.0).

Today the key economic report will be weekly Jobless Claims (E: 218K) and as we’ve consistently said, the sooner this number moves towards 300k, the better for markets.  We also get the final Q2 GDP (E: -0.6%) and there are two Fed speakers, Mester (1:00 p.m. ET) and Daly (4:45 p.m. ET) but they shouldn’t move markets.

Like the past several days, the British Pound and 10-year GILT yields will drive global markets.  If the Pound drops and GILT yields rise further, stocks will fall and could give back most, if not all, of yesterday’s gains.

Why the U.K. Budget Drama Matters to You

What’s in Today’s Report:

  • Why the U.K. Budget Drama Matters (Hint: Spiking Yields)
  • Two Technical Takeaways from Yesterday’s New Lows

Stock futures are trading cautiously higher while yields and the dollar ease from yesterday’s highs after the Fed’s Evans made some less hawkish commentary overnight.

While speaking on “Squawk Box Europe” early this morning, Charles Evans said he was getting nervous about the Fed’s pace of tightening and that if inflation peaks, the FOMC could cut rates as soon as early 2023 which has sparked a relief rally across risk assets amid renewed hopes for “peak hawkishness.”

Economically, Chinese Industrial Profits declined -2.2% in August from -1.1% in July but slowing global growth is largely priced into the market at this point.

Looking into today’s session there are multiple economic reports to watch including: Durable Goods (E: -1.2%), S&P Case-Shiller Home Price Index (E: 0.3%), New Home Sales (E: 498K), and Consumer Confidence (E: 104.3). Investors will be continuing to look for slowing growth, a moderating labor market and most importantly any further signs of easing price pressures as those are all necessary components in getting the Fed to “peak hawkishness.”

Regarding the Fed, there are several officials speaking today: Powell (7:30 a.m. ET), Daly (8:35 a.m. ET), and Bullard (9:55 a.m. ET). And while it is unlikely any of them echo Evans’ dovish tone form earlier this morning, if they do come across as less hawkish, we could see a violent relief rally play out as stocks have become oversold in recent sessions.

Economic Breaker Panel: August Update

What’s in Today’s Report:

  • Sevens Report Economic Breaker Panel: August Update
  • S&P 500 Reaches Key Technical Support: Chart

Stock futures are steady this morning as this week’s rise in both the dollar and bond yields has paused while economic data in Europe was better than feared

Economically, the Eurozone Manufacturing PMI was 49.7 vs. (E) 49.0 and the Services PMI came in at 50.2 vs. (E) 49.0 which is helping ease some stagflation concerns after last week’s soft growth numbers yet stubbornly high inflation across Europe.

Looking into today’s session, the focus will be on economic data early, specifically, the PMI Composite Flash (E: 49.2) as investors will want to continue to see steady moderation and evidence of slowing growth but not an all-out crash in the data either. New Home Sales (E: 575K) will also be released shortly after the open.

Outside of the data, there is one Fed speaker on the calendar: Kashkari, but not until after the close (7:00 p.m. ET) while there is a 2-Yr Treasury Note auction at 1:00 p.m. ET that could move yields.

Bottom line, news flow has not been decidedly negative over the last few sessions and the pullback in stocks has been largely driven by the rally in the dollar and rising bond yields. So if we can see those two markets stabilize, equities should be able to stabilize today as well, especially with the S&P into solid technical support, however, if the dollar and yields both grind higher, expect further volatility in the stock market ahead of Jackson Hole.