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Chatter about a “pause” after December hike
Earlier this week, we noted that a number of investors were citing the growing probability of a Fed “pause” of sorts after the December hike (+50 to +75bp) — by then, Fed funds will be 4.5-4.75% and sufficiently restrictive for the Fed to be allowed to take a look around.
- and in the past 48 hours, such chatter has grown
- see the comments shared by Antoine of Jefferies (Fundstrat marked in red)
- a few things struck us
- a number of major banks (MS, GS, Citi, BMO) closed their “hawkish Fed” trade
- one economist talked about a possible Fed shift to “tolerating inflation”
- so, it is not a pivot, but a pause, which is a pivot of sorts in the path of Fed hikes
At this point, this could be merely market speculation. There is a lot of Fed speak this week and many over the next few days (see below) and we will have a better sense for how much of this possibility of a “pause” is speculation or stemming from a possible Fed change in their “reaction function.”
POSITIONING: Eventually positioning changes market to see things “half-full”
Investors are skeptical of any market gains, because of the continued failure of equity rallies to move above prior highs (instead lower highs) and our Head of Technical Strategy, Mark Newton, sees S&P 500 >3,820-3,850 as the key level. And we know markets continue to point an eye towards rates and USD to confirm any move in equities.
But at some point, another change in market psychology will take place. The same incoming economic data, which has to date been mostly viewed as “bad news” will start to be viewed as “less bad” or even good. Yet, the cadence of the data may not be changing that much.
- that is, we believe confirmation biases could flip
- we previously talked about confirmation bias is a human tendency
- take a look at the pictures below
- and take a look at the colors of the dress highlighted
- think of this as macro data, but seen from the eyes of a bull and eyes of a bear
Surprise. The dresses are the same color.
- literally shows what we see as bullish or bearish can be a function of our own confirmation bias
FED PAUSE: 4 reasons a Fed “pause” would cause significant change in asset allocation
A lot of investors might be quick to dismiss a “pause” because this is different from a Fed “pivot”
- a pause simply means Fed is shifting back to data dependency
- vs the current “hurry and catch up” to the inflation puck
- a pivot is Fed preparing to cut rates
Why does a “pause” matter? Investors are not positioned for a pause:
- fixed income/credit investors have been betting on higher rate (Fed is behind)
- retail equity investors are buying record levels of “puts” surpassing that of COVID-19 lows
- institutional investors, per the BofA FMS (Fund Manager Survey) are 3 std deviations UW equities
- even corporate insiders are beginning to buy stocks again
PAUSE: Would Street still keep these positions in a “pause”?
Logically, would the Street still keep these positions if there was a “pause”? We don’t think so.
As the CFTC data below shows, investors are short bonds (bet on higher rates) for all tenures of rates. This is an expression of a “hawkish Fed”
As highlighted by @zerohedge, retail investors’ spot gamma on puts is exceeding levels seen around March 2020 lows (record bearish) and the call premiums at the end of 2021 (record bullish)
- this, in our view, is quite important signal
INSTITUTIONAL INVESTORS: BofA FMS, Record UW equities, even lower than during GFC or COVID
The latest Bank of America Fund Manager Survey was published today. This is widely followed by investors because the completeness of the participants of the survey.
- Hartnett notes this report “screams capitulation” from macro, investors and potentially from policy.
- Equity UW is now 3-std deviation low
And the “net allocation” to equities is even lower than in 2008. This is what makes 2022 so unusual, as stocks have fallen faster than the economic cycle has moved. Interest rates have also moved far faster, following Fed action. But this is the source of the cross-roads.
- if a deeper economic retrenchment is underway, then uncertainty can grow
- but if the Fed is set to “pause and look around”
- this would mark an important point for equities
- The “net allocation” to equities is lower than COVID-19 low and the GFC
- again, if the world is set for a “Greater hurt” then things can get worse
CORP INSIDERS: Even insiders are beginning to buy stocks
Corporate insiders are even nibbling at equities as the ratio of Buy/Sell has moved above 0.14 as noted by @jaykaeppel of Sentiment Trader. As highlighted on the chart below, crossing above 0.14 is actually generally seen in rising/inflecting higher markets.
BREADTH: 3.3 std-deviation surge in NYSE Upticks – Downticks
One of our research analysts, Matt Cerminaro, also highlighted this surge in market breadth, as measured by NYSE ticks:
- NYSE net ticks saw a 3.3 std deviation move
- as highlighted on the S&P 500 price chart below, this has often happened at bottoms or rising markets
- but this delivered “false signals” in 2001
- and was a “bit early” in 2011
The actual forward returns are shown below.
INFLATION: “Soft” data still shows cooling inflation but “hard” data not in agreement
While the September CPI was “too hot” and obviously a major disappointment, economists still see reasons for inflation to downshift:
- JPMorgan sees headline CPI falling to 6.8% by December 2022
- CPI headline is currently >8% and October CPI forecast to be ~8%
- so falling 1.2pp in two months is a major decline
GOODS INFLATION: 51% of Goods CPI basket (by weight) is “deflating” from peak
Over half of the goods/commodities components of CPI basket (by weight) is already in absolute price decline from “peak” as shown below:
- this figure is currently 51.5%
- up from 20% earlier in 2022, or >2.5X rise
- and approaching 65% level seen throughout the past decade
And as shown below, the commodity diffusion (% off peak) leads the actual commodity CPI change itself.
- the lead time varies
- but this also suggests commodity CPI YoY is set to fall far further than it has so far
- this is another reason to expect falling inflation
…Used cars are down 10% YoY…wow
A good example of the downward acceleration is used car prices. As shown below, Manheim used car prices (mid-month) are down 10% YoY (down 2% from Sept month-end to Oct mid-month).
- this should further influence a lower CPI used car reading
- this has not happened yet, however
CPI SERVICES: Diffusion improving, but CPI services keeps powering ahead
Unfortunately, the linkage between Services diffusion (% off peak) and CPI Services seems to have strongly de-linked as shown below:
- CPI diffusion is declining modestly and around 20% of items
- but CPI services YoY is powering higher
- since this diffusion is measuring items off “peak,” this implies many items are still rising
- leading to higher CPI
- wage-driven categories are rising and this can be viewed as the uniqueness of this inflation driver
- Housing is a big driver of CPI services
HOUSING: Goldman Sachs sees lags driving CPI shelter well into 2023
GS economists, led by Jan Hatzius, see shelter/rent inflation continuing strongly in 2023. Their work highlights the known lags between price indices market-based and the CPI measures. And while there are multiple other factors discussed, the takeaway is:
- CPI shelter, a key component of core, will be elevated well into 2023
- CPI shelter might be as high as 7% by end of 2023
- While GS sees this as driving tigher policy
- Many might view this as a “Fed tolerating inflation” or even seeing Core “ex-housing”
Economists are not in consensus that the Fed has to keep banging away with higher rates at each inflation print. This Op-ed by Paul Krugman makes the opposite argument. Essentially, he argues that core inflation is not a great measure of prevailing inflation. This is distorted by high shelter prices
And in support of that view, take a look at the Redfin data on home listings:
- % of listings seeing price drops is now 8% and surging
- isn’t this the opposite of inflation?
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
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