I think it is going to take a long time to go from 6.8 to 2% on PCE
Annecdotal, bur I got a automatic pay raise from my company (very grateful btw) that I didnt ask for as an inflation adjustment. Im sure its not just me. Wage inflation is sticky because then the higher prices become the norm.
I think the fed is taking the right wait and see approach right now, due to macro factors out of their control, but we shouldnt assume a pivot any time soon.
One thing I was reading last night was the focus on what Powell said in his press conference: that the Fed will be very data-driven going forward. That has been interpreted by many to mean that the Fed is going to be hyper-focused on CPI, PPI, PCE, Core PCE, when determining whether additional increases are appropriate. It also could mean the Fed will stop raising rates when those numbers come back down even slightly. I still don’t think we are going to get the “soft landing” the Fed is aiming to achieve, but this makes it more likely that the Fed will react more to the actual numbers coming in and will continue to raise rates until we are on a path back to 2% annual inflation.
I agree with Phil… I think PCE & Core PCE were “close enough” for the market to be content as it was probably overly bearish before big earnings started coming out. Personal spending & income were also both above forecast. People spend more, but they are also making more.
J Pow did mention that it takes time for the effect of their rate hikes to be felt and trickle down, so it’s kind of just a waiting game to see what the various weekly & monthly numbers continue to produce to see which way the economy is heading. This month when they don’t meet will be good to allow things to soak before they decide if they need to deviate from their end-of-year target.
Also by the next fed meeting, we will have passed through peak hurricane season. Travel season will have also passed and the summer peak of gas demand. If we don’t start to see prices come down by then, the fed might give a little extra 25bps bump to their expected number.
I feel like earnings this quarter are going to continue to be “good enough” for most companies and investors will feel like this is a good buy in point. Some stocks have bottomed out while others still remain volatile.
This thread looks like a good place to share this twitter thread about the US Dollar and why the value of it matters, i.e. the rising DXY that I keep mentioning in TF and in Yong’s tech anal notes.
https://twitter.com/fintwitnotes/status/1553381544647020546?s=21&t=7d_IAVXxd0JGJNbWqNvLgg
Reviving this thread because I want to start to get in the habit of tracking and staying ahead of coming news/data catalysts because that is where we’ll find our edge. Let’s take a look at this chart for a second:
This is why I harp so much on sentiment/catalysts because it’s what actually moves the market. We as a community spent all week last week being bearish on SPY but it wasn’t until the event that we actually got our move downward. Today intraday while all sorts of bearish news is coming from everywhere, it wasn’t until our consumer sentiment numbers dropped that the market decided to make a significant move.
The thing that we are good at as a community is deciphering what is good and bad about data that is released. I had a brief conversation in TF over a week ago where I posed the question “What is the next catalyst for a move down because I can’t see one on the horizon”. It only took but 3 minutes of discussion before @TheMadBeaker suggested Jackson Hole and we all agreed that would be a bearish catalyst. Then today when consumer sentiment numbers came out, I asked TF what they meant and everyone agreed it’s bearish because it points to the FED needing to get even more aggressive on rate hikes to bring down inflation.
This was two points without any charting, voodoo or astrology that the market made sense and that if you’d waited, deciphered the information and positioned based on it you would’ve been deep green.
That is the Valhalla that we should be. Live and die by the calendar and the catalysts and if we do it right each event is basically a scheduled pay day for us all.
So with that said, I want this to be the place that we examine coming events and create plays based on them. Let’s get to work because there is money sitting on the table that is ours and we need to take it.
Looking at this employment numbers could be a catalyst and are something to watch when they release but I’m thinking PMI may be the next large catalyst on the horizon as to my understanding that is forward looking and there is growing sentiment that inflation hasn’t peaked. Personally I am skeptical that this specific release will corroborate that.
One thing the market likes to do is wait for all the information so PMI may cause a temporary movement and then true direction could be established by unemployment numbers the following day in either event both should be profitable.
According to the state of the economy to be bullish I’d think we’re looking for PMI to come down (someone correct me if I’m wrong) and for unemployment to rise. If someone with a better grasp on the economics of it could weigh in it would be appreaciated.
Agreed. So far with the numbers that came out this morning, it should mean that the feds need to increase their rate hikes and the ones they have done still isn’t cutting down inflation. Also blame the “inflation act/bill” that has nothing to do with actually reducing current inflation. 380 to 400 is a big area on SPY from previous drop so that is something to watch and like you mentioned, let’s watch the numbers coming out this week and adjust our earnings plays or other news plays accordingly.
Experts please feel free to rip apart/critique this thesis. What do we think about was weakening retail stores? We have seen earnings drop across a lot them and lowered guidance. Several of them report excess inventories. Inflationary pressures due to energy will further lower the bottom line. Anecdotally/arguably a crash at Lehman brothers triggered a cascade of events leading to 2008 crisis where it brought to front the underlying economic issue. Could we see a cascade of such events if one or more stores for e.g. BBBY announce restructuring or something similar. Just some food for thought, not predicting a recession but a discussion of catalysts
I’m not really sure that is the type of sector that is really in danger of that sort of thing but this is probably better fielded by the smarter people in the room.
Adding this to the conversation, the White House is stating that they’re expecting job numbers to cool off
I really love this thread and I think it could be insanely valuable to Valhalla. We have the ability to get ahead of data and anticipate where equities will go and what the economy will do in a very intentional and systematic way. I want to talk about the fed a bit then talk about how I discern data points from the perspective of the real economy and or sentiment, but first, Something I have been wanting to say about macro trading:
IMO Valhalla wins when we try to understand what is actually happening in the market instead of reacting to the market. The best trading days I have had this year were broad market declines based on Macro, literally anyone could have bought puts in almost anything and made money. No callout necessary. Look at the Beakmap from last Friday or today for instance, you could have throw a dart at it and wherever it landed would have made money scalping puts with the conviction and understanding of the move. Although targeting specific names has value, outside of ER’s trading macro has less to do with the individual names declining on a single day as it has to do with why they are declining in the first place. Then from that, you find the easy targets, usually starting with a sector first. Hopefully we can all learn from each other here and get a little better at understanding this wild market every day. This is why I love Valhalla and why I am here.
The fed is pulling what levers they can to fight inflation without cratering the market. They have 2 mandates, one is stepping up in times of crisis and the other is to manage inflation. We are seeing #2 now, will most likely see the other within the next 12 months.
If we think about this from 2 camps it looks like this.
#1 The fed is hawkish and tightens to control inflation. Great, we wont have roaring inflation like we saw in the 70’s. But as destructive as high inflation can be to the economy, tighter monetary policy or deflation is equally as destructive to balance sheets thus equity markets due to less cocaine in the system (credit) Less credit or leverage means less buying power or demand to go around.
#2 The fed doesn’t do enough to get a hold of inflation. This means most American’s continue to be squeezed by high prices in areas they need, like housing, food, and energy. Excess dollars or discretionary income get funneled to select sectors while the rest of the market suffers.
In both cases, any purchases that were made during the cocaine frenzy need to be paid back. This could be homes, cars, credit cards, business loans, in store revolving accounts, etc.
Regardless of what the fed does now there is pain ahead in the form of a recession, this pain most likely will be longer and harder than most expect. Again, where is the bull case here? Where is the demand going to come from? From my research into every bear market, recession, and black swan event from the last century and further, I believe we are headed into a global contraction that will last 12-36 months in the real economy. This has more to do with the global increased standard of living, the financial health of everyday Americans, and the global credit impulse the last decade than what the fed is currently doing. I say this because I believe the data shows we were already contracting well before anyone was paying attention to CPI and FOMC meetings.
So how do we play a potential catalyst?
I believe the challenge and opportunity is to understand what the data is saying about the real economy while understanding how the market will react as they may or may not be in alignment.
Here is an example I alluded to above.
Eventually we will see and confirm that inflation has “peaked”. Could have already happened honestly. We know without a shadow of a doubt historically and mechanically this means contraction. The Federal Reserve does not actually print money, they buy and sell government notes that increase or decrease bank reserves that can be used as collateral by depository institutions to lend more money to the private sector and eventually consumers. Its this lending of money through fractional reserve banking that ultimately “creates” money.
The road of deflation can shock the system. By taking away this expansion of credit, businesses are left with high labor costs that were driven up by higher and higher COL the last few years, luckily revenue and earnings allowed them for the most part to absorb these higher expenses. When deflation happens, businesses still have the higher labor costs, but now don’t have the synthetic revenue and earnings that they have seen from the fiscal and monetary policies of the last 10 years.
This is how contraction actually happens. Instead of a Lehman blowing up, its a long period of time where our productivity “catches up” to the wages and spending we have normalized.
The fed and our government may have contributed to the problem by fueling the supply of cocaine, but it really is average everyday American and the reckless financial institutions that are to blame for this phenomenon.
When faced with this challenge, business have to cut back. They do this in the form of managing expenses. This causes a deflationary spiral as business cut back labor costs. Those that have jobs may see less hours, or pay freezes while some businesses choose to cut employees altogether. This means less money or less economic activity that ripples through the economy. People cut back spending either because they have to or because they are scared about the economic future, either way the spiral continues.
Now I wanted to lay out this reality in detail to show how equities have the potential to fall out of alignment with data about the real economy.
If news came out that inflation “has peaked” I believe the market would take that as a sign that the worst is behind us. They would be wrong for the reasons I mentioned above. The market would likely rip, only to be punished when companies and consumers continue to report tighter economic conditions. This is exactly what the fed hopes to achieve, because their narrative is the only control they have in the short term. Any changes to monetary policy takes 6-9 months to work though the plumbing, not the day decisions are made. Markets are forward thinking, but not always accurate in what is to be expected.
So when I see economic data come out, its always from these two perspectives. What does the data say about the real economy going forward? (Always thinking of credit impulse and corporate balance sheets) and What does the data say to the markets? (Thinking sentiment and fed psychology)
I would love to have this thread serve as an area to discuss upcoming data events.
We can use it to discuss the fundamental side with the sentiment side, as both speak to the same or potentially different trades.
Where I see both eventually being forced to come into alignment and my highest area of conviction is any data point that speaks to future earnings and labor. Primarily Q3 and Q4 this year.
Looking forward to this thread and continued discussion as always.
Really appreciate this contribution and I wholeheartedly agree. The following bit really hits the nail on the head and is similar to what I’ve been saying for awhile in places like my 2008 vs Now thread which is “If you’re looking for “the big drop” you have to find out exactly what is going to be the catalyst.”
I think one thing that is commonly missed is that while the market is absolutely forward looking, it only uses the data that is presented in the here and now to really make those projections. As you said, we’re looking towards Q3 and Q4 before the real effects of tightening monetary policy become evident and it’s likely around that time that we’ll see the catalysts for another leg down. Until then, that issue doesn’t really exist to the market as it has absolute tunnel vision.
As you said again the market is really trading based on where we’re at with inflation for the moment and any data that points towards inflation not having peaked is bearish and the reverse is bullish so knowing this we’re definitely still looking towards CPI, PMI and employment figures to really give us the catalysts for direction and likely will until that “confirmation of peak” which we surely haven’t gotten.
PMI is coming up tomorrow. Here is the note from the last release:
The ISM Manufacturing PMI edged lower to 52.8 in July of 2022 from 53 in June, beating market forecasts of 52. The reading pointed to a 26th straight month of rising factory activity but the weakest rate since June of 2020, as new order rates continue to contract although supplier deliveries improved and prices softened to levels not seen in two years. New orders (48 vs 49.2) and employment (49.9 vs 47.3) declined and production (53.5 vs 54.9) and supplier deliveries slowed (55.2 vs 57.3) while inventories rose faster (57.3 vs 56) and price pressures softened (60 vs 78.5). Meanwhile, sentiment remained optimistic regarding demand, with six positive growth comments for every cautious comment. Firms are now expressing concern about a softening in the economy, amid developing anxiety about excess inventory in the supply chain.
I understand this is purely anecdotal. The company I work for is a privately owned company in the sector known as “food manufacturing” with $12B in profits last year and approximately 10,000 employees. The last PMI release mentioning excess inventory is interesting.
Firms are now expressing concern about a softening in the economy, amid developing anxiety about excess inventory in the supply chain.
I have a monthly mentor meeting with our CEO. Yesterday we had our quarterly financial address and I met with him for our monthly meeting. He mentioned to me that we can’t keep inventory and our bottleneck is production. We have the facilities and demand for inventory, we just can’t keep up with demand.
Again, my perspective is anecdotal but still opposite of what PMI reported last time.
Would have to see a breakdown of PMI by sector, but I feel like the food (grocery store) industry is still simply trying to keep their shelves consistently stocked or at least figure out exactly what the consumer is and isn’t buying. Some items I see keep running out regularly, other items I’ve seen they have way too much of and nobody is buying.
When I was at the super center yesterday I noticed they had a lot of stuff all over the store marked down on rollback or clearance. Everything from outdoor, automotive, clothing, appliances, electronics, etc. All the end-caps were marked down stuff, things in the middle of the isles, it was all kind of overwhelming.
I also try to pay attention to what’s in people’s carts every time I go, and for the most part it’s just groceries. Maybe a couple clothing items. It’s not like what it used to be 2-3 months ago, but then again too we are winding down summer and gearing up for back to school.
We had the jobs related portion of data drop this AM. Numbers point to a market that is remaining strong but not significantly strengthening. Sentiment imo would be slightly bearish but probably not enough to move the needle much. My current assessment of market impact is that it’s neutral.
Market is very likely looking towards PMI data to find direction. We’ll see what PMI gives us at 9:45 / 10
As was called out, our assessment of jobs being neutral was correct as the market traded sideways into the 10AM PMI release and then PMI numbers dropped and our bearish assessment was again correct as a selloff was triggered.
I would be somewhat skeptical of the longevity of the downward movement however. While PMI was bearish it didn’t show significant expansion and did show a drop in pricing. The raw figure was higher than consensus but the same as previous. Looking for this to be priced in somewhat quickly.
Coming up tomorrow we have the Unemployment Rate and Non-Farm Payrolls. The Market will be looking for additional hints on whether or not inflation is a growing problem or subsiding in this data. Today’s catalysts were correctly read and at least for now it would appear as though I was right to be skeptical of additional downward movement due to the mixed sentiment of PMI:
Now it’s pertinent to remember this statement from the White House which could come into play tomorrow:
If the market sees higher unemployment and a reduction in payroll that would be a bullish catalyst as it’s an indicator that inflationary pressures could be easing. Obviously this means that the opposite is true and if the labor market is still strong that would be an additional bearish catalyst.
Similar to today the game plan for the community is to wait for the drop, assess the sentiment and play accordingly.
I’m looking at tomorrow in the same way. Unemployment going up could potentially be seen as short term bullish (sentiment) due to the idea that the fed will not have to be as aggressive. As we know though, long term this would fall into the recession thesis (fundamentals) So I would not go full port long if we see green. My opinion is that both roads lead to the same place, but unsure how the market will react short term. Ill be holding a Bear focused strangle since the news will drop pre market and I want exposure to any surprises, but it will be light in capital since technicals are telling me we may be due for a dead cat bounce. Either way scalps should be good again tomorrow, hope everyone is having a great day.
Two major indicators with three possible outcomes each. I would start preparing around what each of the above/below/consensus impact of those so that we can react accordingly. I like putting things into a matrix as a point of reference for news drops.
| Above | Below | Consensus | |
|---|---|---|---|
| Payroll | Inflation is still hot, fed policy may not be working quickly and could be bearish | Inflation is cooling, could be neutral to bullish depending on unemployment | Forecasted for slowdown, could be bullish if consensus is met |
| Unemployment | Fed policy may be working, could be bullish | Jobs market is still hot, fed policy may not be working quickly and could be bearish | Forecasted for neutral, if neutral could be bearish as shows that things have stabilized but not slowed |
This might be a strategy to consider when trying to prepare ourselves for news events when the flood of details that comes in all at once. Then it’s just look at the chart, pick your color combination and see what happens.
