Month: June 2022

Mark June 15th (VIX exp.) & June 17th (options exp. OPEX) as a key turning point due to very large expirations and the FOMC (6/15).

Until then, SpotGamma warns, rallies should be categorized as “short covering” and subject to failure.

It turns out, as Bloomberg reports, that distrust of any tentative rebound in global stocks is at the highest in a decade.

News story mentions of “bear market rally” are at the most since at least 2012, while those containing “buy the dip” have slumped to the lowest since 2020. That’s according to articles from all sources that have appeared on the Bloomberg Terminal.

And fundamentally-speaking, one leg of the false-hope-stool for a Fed Put just got kicked out this morning as Nomura’s Charlie McElligott notes that it now seems that Fed’s Bostic has been messaged to walk-back his prior “pause” commentary, clarifying in an interview last night with Dow Jones MarketWatch that his suggestion last week of a September “pause” should NOT be construed as a “Fed Put”.

As McElligott details, yes, “peak hawkishness” is very likely past us, killed-off by Powell’s early May comments which effectively ended the 75bps hike “hawkish left tail” scenario, which then meant that the “peak Rate Vol” highs were in as well as that “shock path” was removed…And yes, “peak inflation” is also likely behind us at this juncture now as well

However, McElligott continues to have bunches of reasons why Fed “hawkishness” and Rate Vol have scope to remain persistently “higher” for some time

• Yes, the Fed is getting results which they’d been hoping-for from their aggressive, front-loaded tightening: we have seen continued signs that Housing is softening (more misses today in Mortgage Apps, Purchases and Refis), that Labor is showing signs of moderating, and critically, Survey data is getting accordingly “hammered,” with Inflation Breakevens then “cratering” off recent highs, as the implications of the FCI tightening begin to evidence a hard “slowdown” dynamic…

• BUT THAT IS THE POINT, because this is exactly what the Fed needs to pinch “demand”…so you do not stop prematurely, especially as we have yet to see a credible explanation for just how the Fed gets back to a 2% inflation target with jobs still printing 400k+ a month and with Atlanta Fed Wage Growth Tracker printing 6% and at all-time highs (since the series began in ’97)…we should start by watching the next SEP projections in two weeks at the Fed mtg

• Rate Vol abroad, as the ECB is trapped right now, with pressure to act after this week’s inflation data forcing their hand into a “hawkish” liftoff, with July hike and plans to end asset purchases very early in July as well, with ECB staff projections certain to show core inflation dynamics above target and for longer, which will keep a “50bps hike” potential on the table now too

• Crude Oil’s latest spasm back near March highs off the back of the new EU / Russia ban, US peak “driving season” commencing, China’s gradual reopening (*BEIJING CITY COVID SITUATION EFFECTIVELY CONTROLLED: OFFICIAL) and daily record new-highs for Gasoline and Diesel in US, with little SPR optionality at this juncture, give real “delta” to a left-tail trade here

• QT begins today—which matters per 2018 “scar tissue” as “less Cash available to absorb more Collateral,” will impact Repo rates and bleed-into “Spread product” widening, despite being so obviously socialized and anticipated

• Finally, Chair Powell’s own words: the current environment is “not a time for tremendously nuanced readings of inflation”—i.e. the Fed is simply reactively managing to the data reality upon us

Ex Fed Dudley opined on Bloomberg this morning, and iterated a few observations above, with this paragraph of particular note:

Second, Fed officials and market participants continue to underestimate the level of short-term rates that will be necessary to tighten financial conditions sufficiently to push inflation back down to 2% from the most recent year-over-year reading of 6.3%. If, in the long run, a neutral short-term rate is 2.4% (the FOMC’s median estimate) when inflation is 2%, then the neutral rate should be higher to compensate for the fact that inflation is higher. 

In addition, given that the Fed’s enlarged $8.9 trillion balance sheet is still providing stimulus – the balance sheet won’t become “neutral” until it shrinks to its desired level in about three years – the neutral short-term rate needs to be higher in the meantime.

Net / Net, there is a scenario in 4Q22 where we *DO* see the Fed downshift from 50s to 25s, which will likely be taken as a “greenlight” by Equities that the light at the end of the tunnel is there – but we are not there yet, and until we see the Fed’s preferred measure of Core PCE begin to dip from current 4.9% probably down sustainably below 4.0 into the mid 3s and evidencing “escape velocity,” I believe we should plan on 50bps hikes continuing.

Finally, McElligott points out – confirming SpotGamma’s earlier comments – that the current “signals” from the Options side are NOT showing a lot of “believers” or high-conviction that this is any sort of a “paradigm shifting rally,” instead treating this recent rally as yet-another “bear market oversold bounce” and remaining skeptical.

There is one group of ‘dip-buyers’ though. As we detailed previously, corporate insiders are buying as institutional money exits.

As The FT reports, despite retail investors pulling out of the stock market and the looming threat of a slowdown or recession, “corporate insiders are holding a non-consensus view across most sectors and [are] actively buying the dip”, analysts at JPMorgan said in a May 27 note.

Strong insider buying “has historically been a pretty good sign of market bottoms”, said David Giroux, portfolio manager at T Rowe Price.

“Insiders are saying ‘we don’t see a massive event coming’ . . . [that] these are really good buying opportunities,” he added.

“This is just another confirming data point that should be positive for the market over six to 12 months if not longer.”

Starbucks’ Interim Chief Executive Officer Howard Schultz and Intel CEO Patrick Gelsinger are among corporate insiders who scooped up their own stock amid the latest market rout that took the S&P 500 to the brink of a bear market.

However, with their share prices plunging, we can’t help but wonder if this ‘buying’ is mere virtue-signaling so that the board won’t fire them for their absymal loss of market cap? 

After recent reports that the US labor market had suddenly hit a brick wall, with mass layoffs surging…

… and job openings according to third-party trackers such as Revello showing that total job postings plunged by 22.5%, the biggest change on record…

… many were looking to see if these dismal trends would be confirmed by today’s closely watched JOLTs report, arguably the Fed’s favorite indicator of labor market softness (or tightness as the case is right now).

That did not happen, and instead the two-month delayed JOLTS report showed that in April, job openings did plunge by a whopping 455K, the biggest one month drop since the covid crash, but the drop was from an upward revised, and even higher record 11.855 million in March, to 11.4 million, the third highest on record.

According to the report, the largest decreases in job openings were in health care and social assistance (-266,000), retail trade (-162,000), and accommodation and food services (-113,000). The largest increases were in transportation, warehousing, and utilities (+97,000); nondurable goods manufacturing (+67,000); and durable goods manufacturing (+53,000).

What is just as remarkable, is that despite one of the biggest drops in job openings on record, the continued tightening in the labor market, there was a whopping 5.4  million more vacant jobs than unemployed workers in April (nearly double the 5.9 million total unemployed workers), confirming that the US labor market remains extremely tight.

And with far more job openings than unemployed workers, this meant that in April there were again less than 1 unemployed workers – a near-record low 0.52 to be exact – for every job opening.

With the number of job openings tumbling, it is not surprising that the number of hires also shrank, dropping from a downward revised 6.645MM to 6.586MM in April. According to the BLKS, hires increased in real estate and rental and leasing (+21,000).

One last observation comes from the April quits rate: after the number of Americans quitting their job hit an all time high 4.536 million in March, this number was since revised lower to 4.449 million, and the April print was 25K lower. Still, the 4.424 Million in April quits was one of the highest on record, and yet another indication that at least as recently as April, workers had all the leverage and were happy to quit their job in search of better paying options elsewhere, hardly the stuff that indicates that wage-price spiral is about to end.

Authored by Matthew Vadum via The Epoch Times (emphasis ours),

The Supreme Court voted 5-4 late on May 31 to temporarily block a Texas law that prevents social media platforms from censoring users based on their political views.

Known as HB 20, the state law makes it unlawful for tech platforms to restrict or remove content based on “the viewpoint of the user or another person” or “the viewpoint represented in the user’s expression.”

The statute also requires the platforms to establish procedures users can use to appeal a platform’s decision to “remove content posted by the user.” The law applies to platforms that have more than 50 million active monthly users in the United States.

Texas Gov. Greg Abbott, a Republican, signed the bill in September 2021.

The case is Netchoice v. Paxton, court file 21A720.

The applicants are two trade associations representing big tech—Netchoice and the Computer and Communications Industry Association (CCIA). The respondent is Ken Paxton, a Republican who is the attorney general of Texas.

Silicon Valley giants oppose the legislation, claiming it is unconstitutional.

After the new ruling CCIA president Matt Schruers praised the order.

“We are encouraged that this attack on First Amendment rights has been halted until a court can fully evaluate the repercussions of Texas’s ill-conceived statute,” he said in a statement.

“This ruling means that private American companies will have an opportunity to be heard in court before they are forced to disseminate vile, abusive or extremist content under this Texas law.

“We appreciate the Supreme Court ensuring First Amendment protections, including the right not to be compelled to speak, will be upheld during the legal challenge to Texas’s social media law,” Schruers said.

“The Supreme Court noting the constitutional risks of this law is important not just for online companies and free speech, but for a key principle for democratic countries. No online platform, website, or newspaper should be directed by government officials to carry certain speech. This has been a key tenet of our democracy for more than 200 years and the Supreme Court has upheld that.”

The emergency application was filed with the high court on May 13. The opinion was released at the end of the business day on May 31.

The decision cut across the court’s ideological lines.

Liberal justices Sonia Sotomayor and Stephen Breyer joined with conservatives John Roberts, Brett Kavanaugh, and Amy Coney Barrett to slap a hold on the law. The five justices did not explain why they voted to approve the order.

Conservative justices Samuel Alito, Clarence Thomas, Neil Gorsuch, and liberal Elena Kagan voted against granting the order. Alito wrote a dissenting opinion (pdf) which Thomas and Gorsuch joined.

Netchoice and CCIA characterized HB 20 in the application (pdf) as an attack on Silicon Valley companies.

The statute “is an unprecedented assault on the editorial discretion of private websites [like Facebook.com, Instagram.com, Pinterest.com, Twitter.com, Vimeo.com, and YouTube.com] that would fundamentally transform their business models and services,” the document stated.

“HB20 prohibits covered social media platforms [many of which are members of Applicants NetChoice and CCIA] from engaging in any viewpoint-based editorial discretion.

“Thus, HB20 would compel platforms to disseminate all sorts of objectionable viewpoints—such as Russia’s propaganda claiming that its invasion of Ukraine is justified, ISIS propaganda claiming that extremism is warranted, neo-Nazi or KKK screeds denying or supporting the Holocaust, and encouraging children to engage in risky or unhealthy behavior like eating disorders.

“HB20 also imposes related burdensome operational and disclosure requirements designed to chill the millions of expressive editorial choices that platforms make each day.”

Alito rejected the social media platforms’ arguments in his dissent, saying whether the companies’ will ultimately win their case “under existing law is quite unclear.”

“It is not at all obvious how our existing precedents, which predate the age of the internet, should apply to large social media companies,” the justice wrote.

“This application concerns issues of great importance that will plainly merit this Court’s review. Social media platforms have transformed the way people communicate with each other and obtain news,” Alito wrote, referencing a Pew Research Center report from a year ago that stated that more eight out of 10 Americans obtain news from digital devices.

Describing HB 20 as “a ground-breaking Texas law,” Alito wrote that it “addresses the power of dominant social media corporations to shape public discussion of the important issues of the day.”

A federal district judge previously enjoined Texas from enforcing the law but a panel of the U.S. Court of Appeals for the 5th Circuit reversed that order on May 11, as The Epoch Times reported.

Attorneys representing Texas told the 5th Circuit that social media platforms “control the modern-day public square, but they abusively suppress speech in that square.”

A federal judge blocked a similar Florida law, finding it unconstitutional.

Russia’s nuclear forces have launched fresh drills northeast of Moscow, in the Ivanovo province, according to new Russian defense ministry statements Wednesday.

Reuters cited Interfax news agency to report that “Some 1,000 servicemen are exercising in intense maneuvers using over 100 vehicles including Yars intercontinental ballistic missile launchers,” based on the Russian MoD statement.

Some Western media reports are seeing the drill as a response and warning to Washington over the White House approving yet more military aid and weapons to Ukraine, particularly longer range rockets.

Newsweek, for example, writes that “The report follows the announcement that the U.S. has approved a $700m package of security assistance to be sent to Kyiv, which will include helicopters, anti-tank weapon systems and medium-range high mobility artillery rocket systems.”

The Kremlin is meanwhile issuing new warnings over the US violating its stated “red lines”…

RUSSIAN FOREIGN MINISTER LAVROV SAYS THERE ARE RISKS THAT A THIRD COUNTRY COULD BECOME INVOLVED IN UKRAINE CONFLICT DUE TO SUPPLIES OF ROCKET LAUNCHERS

It also comes interestingly as a new consensus has emerged that Russian forces are winning in Donbas, amid the latest steady gains over the whole of Luhansk province, and as the final Ukrainian holdout city of Sievierodonetsk is poised to fall to the Russians. The fresh White House move to send in longer range rockets (which are in effect ‘medium-range’) seems aimed at stalling the Russian gains made in Donbas.

The Biden administration last week said it would reject the possibility of sending long-range rockets, fearing things could spiral toward rapid escalation with Russia, after the Kremlin declared “red lines” concerning this type of major West-supplied weaponry.

In President Biden’s Tuesday New York Times op-ed outlining “what America will do and not do in Ukraine,” he stressed that he doesn’t believe Russia intends to use nuclear weapons. “I know many people around the world are concerned about the use of nuclear weapons,” he began on this point.

Location of Wednesday’s drills in Ivanovo Oblast:

“We currently see no indication that Russia has intent to use nuclear weapons in Ukraine, though Russia’s occasional rhetoric to rattle the nuclear saber is itself dangerous and extremely irresponsible. Let me be clear: Any use of nuclear weapons in this conflict on any scale would be completely unacceptable to us as well as the rest of the world and would entail severe consequences,” the president said.

US equity and bond markets just lurched lower (in price) and the dollar spiked higher as a combination of headlines hit.

• Stagflationary signals from manufacturing surveys – inflation is sticky and degrowth is not slowing it

• Bank of Canada hike – CAD yields spike knocking into USTs

• JOLTS printed super strong – Fed has more work to do

• JPMorgan’s Jamie Dimon warned on the economy, “It’s a hurricane, you’d better brace yourself.”

• oh and Fed QT started today.

Put all that together and equities tumbled…

Treasury yields spiked…

And the dollar surged…

Finally, we also note that Fed’s Biostic walked back his September “pause” comments, clarifying that this is in no way menat to be a “Fed Put”.