Market Journal: Mid-Day Update
Decisively risk-off. Rates market continues to surprise.
Discussion
As I told a friend this morning, the market environment is shifting away from a mechanical “tape” dominated by options market flows to one where broader macro and technical realities will start to come to fruition. The fact we’re seeing such decisive risk-off cross-asset price action in a “window of strength” is a really key tell regarding this shift.
What makes today decisively risk-off is the fact the VOL complex and HY CDX are holding their moves from this morning. There was a bit of an attempt at reversal, likely in response to Patrick Harker’s soft landing speech, but as regular WOTE readers know full well, the Fed has lost the ability to rhetorically manage markets here for two reasons: 1) the long end of the TIPS break-evens curve is on the move, thwarting any credible attempt to talk down rate hikes without long term inflation expectations becoming unanchored; and 2) if the economy really starts to break down here in the 3/4Q23 period, the Fed is fully boxed in from cutting rates anywhere close to soon enough to stave off a hard landing.
Nothing moves in a straight line, and once the market becomes oversold likely around the SPX 100-200dma this week of next, the set up is there for a relief rally into Powell on August 25 at Jackson Hole. Then of course the fun begins into September/October.
Exhibits
Decisive risk-off move in VOL and HY CDX.
Defensive sectors outperforming but this outperformance is flagging a bit as rates yet again gain traction (see below).
Rates were very risk-off this morning, but are now recovering. Amazing. I remain befuddled by the entire complex.