The Market: 30 Days to Financial Crisis 3.0
Discussion
Based on the action in the bond market (higher rates, more inverted curves) and now today’s blowout ADP report, it appears the economy is taking path #2 as outlined on July 1 below, that being: The economy outperforms the Fed’s projected path as outlined in the June SEP.
Flows and positioning suggest a move to 4600/4700 by July 19 before a correction into that September/October danger zone. The problem is the bond market has now moved into a position that precipitated the UK LDI crisis last September 23 (Financial Crisis 2.0) and the SVB crisis this March 9 (Financial Crisis 3.0), both of which came quickly on the heels of central bank re-hawking. Powell’s Jackson Hole speech was last August 26, and less than a month later UK LDI hit; and in March, it took just 48 hours for SVB to fail from the time Powell told Congress the Fed was likely to hike by 50 in response to hotter-than-expected data.
We’ll see what happens this time around, but with SPX RSI and DSI making lower divergent highs from the Index itself, at minimum the set-up is in place for a stiff correction ahead of a rally into July 19 opex.