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

S&P, yesterday’s close: Settled at 3883.00, down 28.25

NQ, yesterday’s close: Settled at 11,447.25, down 139.75

Fundamentals: U.S. equity benchmarks, along with other risk-assets, are broadly higher to start the new month. Is this the early stages of another hated bear market rally? We sure hope so, but many, in fact, most, think otherwise. I talk to a lot of people each day, read their writings, and listen to their comments. It is rare to find such an instance, with the S&P down nearly 20% on the year, where the smartest minds shrug off any strength and exude a level of confidence the market has nowhere to go but down. Why are these brilliant minds so confident there is only one direction to go? Can you blame them? In August, at Jackson Hole, Fed Chair Powell literally said, “[the Fed’s rate hikes] will bring some pain to households and businesses.” Furthermore, inflation remains stubbornly high, according to the Cleveland Fed Inflation Nowcast, headline CPI for October is expected to rise to +0.78% MoM and +8.1% YoY. I’m sure they remember Powell, in the same Jackson Hole speech, saying, “the Fed must keep at it [hiking rates] until the job is done.” The fact is, the situation does not seem to be improving, and maybe that’s where our counterparts’ negativity manifests.

Have we, as market participants, become impatient? Our society expects instant gratification, and therefore, our counterparts want and need the Fed to knock out inflation immediately. But it doesn’t work like that, especially this time around, on the heels of a pandemic and during a war, both of which have upended supply chains. Also, at Jackson Hole, Powell acknowledged this conundrum:

“It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed's tools work principally on aggregate demand. None of this diminishes the Federal Reserve's responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.” 

And do their job, they have. The Fed has raised rates by 300bps in seven months this year and is expected to add another 75bps tomorrow after speeding up a taper and while introducing a balance sheet run-off. In doing so, prices of commodities have come down sharply. The Bloomberg Commodity Index is down about 20% from its June peak and flirting with its low range after shedding -8.34% in September. Many individual commodities have lost much more, Copper -30% and Cotton -40% from their peaks are two examples of very liquid markets that have corrected sharply. It is also important to understand these are inputs of everyday demand. 

It does not begin and end with commodity prices, we cannot ignore the most heavily weighted part of CPI, Owner’s Equivalent Rent (OER). Home prices have begun to roll over, but rents lag at a minimum of six months and likely more this time around. Case Shiller noted a meaningful depreciation in Home Values for August, their latest report, by -1.3-1.6%. New Home Sales in October fell -10.9% MoM, and Pending Home Sales -10.2% MoM. If this data does not give a glimmer of light at the end of the tunnel, then we do not know what will.

At what point should the Fed allow this 375bps of hikes to work its way through the system, I believe one thing we can all agree on is that it has not worked through the system, at least in full. This is important to understand, and we will conclude with why. As intermediate-term bulls on price, we inherently believe the Fed has reason to not stop hiking rates but to simply slow the pace of hikes. It would seem many are confused with the lauded term ‘pivot’ and our aforementioned ‘patience’. There is no instant gratification in lowering inflation. We certainly do not expect the Fed to announce a pivot but to normalize the pace of hikes to 50bps and then potentially 25bps in order to allow their hard work to actually go to work. Many of our counterparts cannot see between the lines and are too caught up in the craving for that instant gratification. In doing so, they are blinding themselves to the Fed’s need and desire to be patient, creating what could be the most hated bear market rally of our time.

In being patient, as we noted, an asset price rally is likely to ensue. Should the Federal Reserve care? No. Such a rally does not mean the stock market will go set new highs and commodity prices double, to never look back. The Federal Reserve has already proven it can lower these prices at will, and the situation will remain fluid; tradable. However, OER accounts for one-third of CPI, and we believe their patience aligns with allowing these prices to digest the work they have done, and that means slowing the pace of hikes.

Today’s economic calendar brings a critical data point that we are sure the Fed is watching closely, JOLTs Job Openings. There are structural problems within the labor market, but that is for a conversation another time. However, a light has also begun to shed at the end of this tunnel, Job Openings fell in September to 10.053 million, the lowest since June 2021. If this number comes in below the 10 million expected at 9:00 am CT, it is likely to stoke added bullish tailwinds, supporting the case for patience from the Fed.

We will also look to ISM Manufacturing due at 9:00 am CT.

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

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NQ (December)

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Crude Oil (December)

Yesterday’s close: Settled at 86.53, down 1.37

Fundamentals: Crude Oil is sharply higher this morning with rumors coming out of China helping to stoke risk-on sentiment. Just as news spread yesterday that Shanghai Disney shut down and workers flee from a Foxconn iPhone plant to avoid lockdowns, China loosened virus controls over the city of Zhengzhou and rumors are spreading the government will dial back its zero-tolerance virus approach. After closing on a new low against the U.S. Dollar yesterday, the Chinese Yuan has strengthened by 0.80% to start the new month, helping to lift commodity markets.

Added tailwinds began developing yesterday on OPEC’s yearly report that noted higher Oil demand for longer. The consolidating price action has responded to the news, coupled with the cartel’s plan to reduce their production ceiling this month.

Inventories will start hitting the picture today. Early estimates are for +0.267 mb Crude, -1.183 mb Gasoline, -0.733 mb Distillates.

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Gold (December) / Silver (December)

Gold, yesterday’s close:  Settled at 1640.7, down 4.1

Silver, yesterday’s close: Settled at 19.147, down 0.347

Fundamentals: Gold and Silver are surging on Chinese Yuan strength. In recent days, we have pointed to the Yuan’s weakness as a massive headwind to the precious metals, and today it has improved by 0.8% against the U.S. Dollar after rumors circulated the government may ease its zero-tolerance virus policy. Strength in the Treasury complex has also helped lift Gold and Silver in this new month. There is more, the World Gold Council said central banks bought a record 399 tonnes of Gold, worth about $20 billion in the third quarter. They added that strong demand also came from jewelers and buyers of coins and bars. The news is in direct contrast with ETF flows that showed outflows in the face of rising interest rates.

Today’s economic data will play a key role in determining whether Gold and Silver can hold their rallies into tomorrow’s Fed policy announcement. JOLTs Job Openings and ISM Manufacturing are both due at 9:00 am CT.

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Silver (December)

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