It Was Never A Pivot, But That's Ok | Morning Express 08/3/2022

Posted: Aug. 3, 2022, 9:36 a.m.

E-mini S&P (September) / NQ (September)

S&P, yesterday’s close: Settled at 4093.75, down 26.75

NQ, yesterday’s close: Settled at 12,924.50, down 38.00

Fundamentals:

The move in Treasury yields is inherently the biggest story. Will it derail underlying buoyancy in U.S. equity benchmarks? Yesterday, we highlighted the 30-year Bond’s historic back-test with a chart here and keyed off the rollover in the Midday Market Minute. One might say that House Speaker visiting Taiwan, or the deluge of Fed speak are bigger stories, but the move in Treasury yields was 20+ years in the making and became the product of those two aforementioned narratives. Many lauded last week’s Federal Reserve meeting as a “pivot”, we disagree. However, their newfound data dependence did allow markets to discount the potential of a less hawkish rhetoric moving forward. The Fed sent Minneapolis Fed President Kashkari, known to be one of the most dovish committee members, out over the weekend to rein in the idea of a “pivot” without saying it directly. Bonds traded sharply higher coming out of last week’s meeting, meaning lower yields, and found added tailwinds from weakening ISM Manufacturing New Orders and Prices Paid for July. The largest tailwind though, may have come from geopolitics and the uncertain ramifications of House Speaker Pelosi’s visit to Taiwan. Amid this anticipation, both the 10-year Note, and 30-year Bond completed a perfect back-test of the 20-year chart highlighted here yesterday. Ironically, her plane landed safely just as a deluge of Fed speak was being delivered yesterday morning. Both San Francisco Fed President Daly and Cleveland Fed President Mester emphasized the Fed still has a long road ahead in fighting inflation, also downplaying the idea of a “pivot”. The byproduct of this fundamental and technical stew has been nearly a 30 basis point rally in 10-year Note yields and a 20 basis point move for the 30-year Bond. Both of which were outpaced by the 2-year and 5-year respectively, meaning the yield curve inverted and flattened more sharply, a recession indicator. Can this stock market rally withstand higher yields? Given the level in which yields are rising from, we seem to believe so. However, what matters most is the velocity of the move and another fallout of yesterday’s magnitude may overpower risk-assets.

Do not miss our daily Midday Market Minute, from yesterday.

We have been cautiously Bullish U.S. equity benchmarks from an intermediate to long-term perspective since mid-May, pivoting from cautiously Bearish for much of the year up to that point. One theme that has helped our optimism is believing in measured downside from S&P -20% on the year for several reasons, not the least of which is excessive negativity. There are many factors to excessive negativity and one of them was mounting expectations for earning’s compression to be the catalyst for the next leg lower. However, it has played out just as we anticipated. Yes, some companies have been severely punished for poor earnings, but broadly speaking with compression and softer guidance expected by the masses, it laid the groundwork for one of the most bullish narratives; a one-two punch of many positive surprises and stocks that do not go down on negative news.

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