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There was a lot of macro chatter, commentary and analysis over the weekend following the extreme market moves post the “very hot” Sept CPI. But there were a few subtle changes that caught many people’s attention:

Post-CPI and even pre-CPI (days into), Fed officials uniformly spoke about staying the course even as CPI seems hotter. This is a more balanced view and reflects the growing risks of financial liquidity issues.
Several economists, citing the recent BLS study, noted that Shelter/OER/rent, the primary source of CPI upside, lags market-based measures and the “gap” is closing. Will this lead to looking at CPI core ex-shelter? Maybe.
Fixed income investors noted a divergence in the Fed funds futures curve, post-Sept CPI. The front-end (near term expiries) only moved up modestly (+10bp) despite a “super hot” CPI while the later-2023 maturities rose. This is a “higher for longer” but several macro investors noted this rise in out periods is also just “risk premia” and conditional on developments. Meaning, the anchoring on the front-end was the signal.
In short, the subtle shift in a “hot CPI” is not necessarily resulting in a Fed banging on another panic rate hike.
Friday’s sell-off in equities was fueled by massive put buying and short-selling. Essentially a reload after the short-covering seen on CPI day.
This is an obvious divergence.

In our multiple conversations over the weekend, it seems like some fixed income investors now see more “balanced risks” for interest rates to rise. This is a change. For much of 2022, the easy trade was to be on higher inflation expectations and higher interest rates.

but if the Fed is shifting towards data dependence, say after Dec 2022
this makes higher rates possible, but far less certain
because equities are so highly sensitive to both interest rates and inflation risks, this is arguably a positive for equities

Fed becoming more balanced?

Below are a few highlights of some pieces over the weekend. The one from Goldman Sachs notes that despite what is an alarming (to Fed and markets) CPI report, the Fed seems to be taking a more balanced view.

In fact, Bullard was quoted on Friday noting 2023 is a “data dependent year” and doesn’t necessarily see the terminal rate above the “dot plot” of 4.6%.

EQUITY: Sell-off on Friday was fueled by short-selling, less so real sellers

The abrupt sell off on Friday, somewhat driven by the higher U Mich Consumer inflation expectations was fueled by short-sellers reloading. That is, after covering shorts on Thursday.

And as Sentiment Trader notes, the put buying was 3X call buying.

first time in 22 years that this ratio was so elevated

…At a time when equity positioning is extremely light

There is a possible subtle shift in Fed reaction function underway, evidenced by the balance comments by Fed speakers post-CPI. There are more Fed speakers this week, and it will be important to see if these are echoed.

this subtle shift is coming at a time when equity positioning seems far more risk-off
see above about put buying
below is Deutsche Bank’s consolidated equity positioning measure, and it shows an extreme low equity exposure
consider this divergence
bond markets do not necessarily see an “easy path to higher rates”
but this is not reflected in equity positioning

EQUITY: Extreme bearish sentiment along with light equity positioning…

And look at US Investors Intelligence sentiment reading (net % bulls), which is at an extreme low. This chart was posted by Raoul Pal of RealVision.

extremely bearish sentiment
extremely light equity positioning
Fed possibly signaling more “balanced” approach
Bond investors see less upside risk of Fed funds into YE
in some ways, this is vaguely reminiscent of June 2022

INTERNALS: Small-cap outperformance still intact and High-yield over investment grade too

Similarly, the relative outperformance of small-caps and high-yield continues. This is encouraging:

small-cap valuations are already extremely lows
and generally outperform during risk-on
high-yield outperforming investment grade is arguing against recession risk

Still all about inflation trajectory

Inflation continues to surprise to the upside. The soft data continues to point to a cooling. And yet, the printed CPI reports show stronger inflation.

as shown below, by Deutsche Bank, stock correlation to the 5y5y real rate is -1.0,
meaning, as long as inflation risks are rising
stocks will have difficulty gaining traction

Cooling jobs market is happening, which reduces inflation risk

Linkup, a labor market information provider, published its updated forecast for labor markets in September:

LinkUp projects job openings fell 2.2% to 9.83 million and bringing JOLTS below 10 million for the first time since June 2021

And this brings JOLTS (job openings) closer to the 7.5-8.0 level seen in late 2019. This is not necessarily where the Fed will be satisfied, but at 7.5 million JOLTS, the ratio of job openings to workers would be far closer to the 1.0 (~1.2 that the Fed would like to see).

And as the recent Fed study highlights, most of the JOLTS openings are targeted towards job switchers. As such, cooling JOLTS doesn’t necessarily lead to a proportionate surge in unemployment.

but as the Atlanta Fed tracker below shows
job switchers have wage growth of 7.1%
while job-stayers are 5.2%
hence, slowing poaching would similarly cool the labor market
in fact, looking at the “job stayer” wage growth, it is not that out of bounds compared to prior cycles
but the strong gains for switchers is higher

LinkUp also tracks job openings posted by S&P 500 companies and this shows that job postings peaked in May 2022. And have since decline 7%.

Only 3 sectors have actually increased job postings since July 31 as shown below:

Utilities
Industrials
Consumer Staples
Other sectors show meaningful declines
while this is not “jobs” itself, but job openings
this is telling us that cooling postings should also eventually lead to less wage pressures

33 GRANNY SHOTS: Updated list is below

The revised 33 Granny shots are shown below. The list is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear in at least two portfolios:

$AAPL in 5 of 6 portfolios
$GOOGL $MSFT in 4 of 6 portfolios
$AMZN $META in at least 2
This reinforces our favorable view of FANG in 2H2022

33 Granny Shot Ideas:

Consumer Discretionary: $AMZN, $AZO, $GPC, $GRMN, $TSLA

Information Technology: $AAPL, $AMD, $AVGO, $CSCO, $KLAC, $MSFT, $NVDA, $PYPL, $QCOM

Communication Services: $GOOGL, $META

Energy: $CVX, $DVN, $XOM

Financials: $ALL, $AXP

Real Estate: $AMT, $CCI, $EXR

Health Care: $ABT, $BIIB, $ISRG, $MRNA, $REGN

Consumer Staples: $BF/B, $MNST, $PG, $PM

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33 Granny Shot Ideas: $AAPL, $GOOGL, $MSFT, $ALL, $BF/B, $CSCO, $NVDA, $PG, $PM, $ABT, $AMD, $AMT, $AMZN, $AVGO, $AXP, $AZO, $BIIB, $CCI, $CVX, $DVN, $EXR, $GPC, $GRMN, $ISRG, $KLAC, $META, $MNST, $MRNA, $PYPL, $QCOM, $REGN, $TSLA, $XOM

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