The Market: Smells Like June '22 OPEX
The Market: Smells Like June '22 OPEX
Disclaimer: For informational purposes only.
Please see here and here for more information about The Weight of the Evidence.
Discussion
The Fed received uncomfortably hot inflation data (CPI and inflation expectations) during the June 2022 pre-FOMC blackout period that led Powell to leak through Nick Timiraos that the Fed planned to accelerate its tightening campaign with a 75 bps rate hike. SPY rallied the day of the actual hike on Powell downplaying the likelihood of another 75, and then went on to fall Thursday and Friday…right into June OPEX.
That June OPEX low all but set the SPY low for the tightening cycle. The low was retested and slightly undercut in the September-October decline post-JPOW “whatever it takes” speech at JHOLE, but for all intents and purposes SPY bottomed on JPOW going all-in on the inflation fight two days before June OPEX.
This Friday is September OPEX. With SPY trading almost precisely in line with the path below outlined in the September 1 Week Ahead on Powell going all-in on the soft landing push, and IG CDX refusing to go down without a fight, the stage is set for a SPY peak to be set today or tomorrow that is unlikely to be surpassed until late November.
The FED
Yesterday, both the SEP and Jerome Powell spelled out EXACTLY what a soft landing looks like, and it’s NOT bullish for an equity market stuffed to the gills with “rate cuts no matter what” hopium.
As evidenced by the whining and complaining across the Street about Powell not being dovish enough…
…the market is looking for something the Fed is simply not going to deliver outside of recessionary labor market conditions. That is: getting to “neutral”, if not below, ASAP, no matter what.
Not only did Powell and the SEP not project getting to neutral ASAP, they actually raised their estimate of the long-run neutral rate to .9% from .8% - subtle, but important - and, most importantly, RAISED their estimate of NAIRU!!!! And not only that, Powell spoke at length about the fact current labor market conditions are indicative of “maximum employment”. In other words…
As soon as the economy stabilizes - which current readings of initial jobless claims implies is happening - market rates are headed higher to account for an even slower cutting cycle than implied by the SEP. The only way the market gets what it’s looking for is if the unemployment rate shoots above 4.4%, which would imply a worse than expected outlook for corporate earnings power.
