Ugly market critical situation treasury markets 5 ways to do it

The ugly stick was on its way on Wednesday. The stick was not shy about who or what it touched, and anything it touched was worse off. Stock index futures traded higher early. You could almost feel that a very negative trap had been set… for the market. Fed officials had been so hawkish in their rhetoric as they paced in and out of Jackson Hole. Did they know something the rest of us didn’t know? It certainly seemed so.

Consumer-level inflation for August, at least as currently measured by the Bureau of Labor Statistics, hit the tape Tuesday morning. It was hotter than expected. It was hot in all the wrong places. It terrified investors. August headline CPI was +0.1%m/m and +8.3% y/y. The year-ago figure was below the 8.5% reported in July, but both numbers were above consensus. Yes, even with the benefit that gasoline prices are down 10.6%m/m and heating oil prices are down 5.9%m/m. These prices were somewhat offset by a 3.5%m/m price increase for pipeline gas services. This did not bode well for the core rate.

In core (excluding food and energy), August CPI came in at +0.6%m/m, up from 0.3% in July and +6.3%y/y, up from 5.9% in July meant. This was the highest year-on-year pressure since the month this streak last peaked (March 2022). Almost a new peak. Nobody wanted to see that. August was also the second consecutive month that prices for both housing and medical services rose above trend, after lagging these two categories for several months. The fact that consumer inflation may still be spreading to parts of the economy that haven’t been hit quite as hard is not only worrying, it’s frightening.

Financial markets had obviously priced in a much cooler report than was published. The S&P 500 fell 4.32%. The worst day for the US market’s broadest large-cap index since much of the country went into lockdown in June 2020. The Nasdaq Composite lost a very ugly 5.16% while the Philadelphia Semiconductor Index took a hit of 6.18%. Small-cap stocks “performed better,” with the S&P MidCap 400 down “only” 3.7% and the Russell 2000 down 3.91%.


They have streets following the results of Tuesday’s regular session’s price determination… “One Way”. The losers beat the winners nearly 7 to 1 on the NYSE and about 4 to 1 on the Nasdaq market site. The rising volume took a 21.5% share of composite trades listed on the Nasdaq and only a 5% share Enter this metric for the NYSE. listings. A hard lesson has been learned by those who chose not to wait for volume-based confirmation of a reversal before allocating capital. For four consecutive “up” days we sounded the alarm loudly. I have not heard this warning from anyone else.

The pros finally emerged Tuesday, and they weren’t optimistic. Aggregate trading volume increased 10.8% day-over-day for NYSE-listed names and a whopping 21.5% day-over-day for Nasdaq names. Trading volume in the S&P 500 and Nasdaq Composite both slightly outperformed their trading volume 50-day simple moving averages. Professional money was on the move Tuesday, trying to convert stocks into cash, but they were too late to get their prize in many cases. Everyone cannot use a single door to exit all at once.

The action in Treasury markets was of paramount importance. The US two-year bond yield rose 18 basis points on Tuesday to hit 3.75%, the highest since October 2007. I see that particular yield trading at 3.78% this morning after hitting a high of over had reached 3.8%. The yield spread between the US 10-year bond and the US 2-year bond broke a key trendline that had been rising on Tuesday…

… The more inverted stance of this spread reflects the now sharply increased doubts that the US economy can achieve anything remotely like a “soft landing”. let me explain.

Situation: Critical

The Federal Reserve, already convinced that aggression is the better way, will be forced at this point to act bolder in the future. The Fed will feel like it almost has to hurt the US economy to rebalance its dual mandate. In addition to the Fed’s quantitative tightening program, which is really just beginning, the FOMC will need to raise the fed funds rate above the theoretical “neutral” rate, likely at next week’s meeting.

The deal is this. Many of you know. Some of you might not. We frequently track the Atlanta Fed’s GDPNow model for real-time modeling of economic growth. The Cleveland Fed releases a nowcasting model for real-time inflation, and this model is revised daily. Currently, the Cleveland Fed model shows the September CPI at 0.33%m/m and the core September CPI at 0.51%m/m. That would be up from the BLS August prints (from yesterday) of 0.1% and 0.6% respectively. On a yearly basis, Cleveland shows the CPI in September with headline growth of 8.21% and core growth of 6.64%. Again, this would be higher than the August BLS data of 8.3% and 6.3% respectively. What Cleveland is telling us is that headline inflation is currently stabilizing where it is and, in fact, core inflation is still rising. This is problematic.

This morning I see futures trading in Chicago pricing in a 66 percent chance of a 75 basis point rate hike next week and now a 34 percent chance of a full percentage point hike. This would raise the fed funds rate to 3% to 3.25% from today’s 2.25% to 2.5% range. Futures are then pricing in at least another 75 basis points on November 2nd with a 73% chance. This would put the FFR at 3.75% to 4%. Futures prices are now suggesting the expectation for FFR to end the year at 4%-4.25% and peak for the cycle in February 2023 at 4.25%-4.5%.

Keep in mind that Main Street, US (excluding housing) generally takes at least nine months to feel changes in monetary policy. People haven’t felt most of what the Fed has already done, nor has it really begun to affect economic activity. According to the St. Louis Fed, the velocity of M2 money actually increased in the second quarter.

We already know that credit card usage has increased significantly. On Tuesday we learned that according to the FDIC, deposits at US banks also fell by $370 billion in the second quarter. This was the first quarterly decline in U.S. savings since 2018 and the largest quarterly decline in savings in U.S. history. Yes, the pace picked up in the second quarter. The good people of Gotham and elsewhere plundered their savings and borrowed to maintain the standard of living to which their households had become accustomed. That was before they lost their jobs, which is to come. Then the speed starts to pull again. Then it gets hard. Really hard.

The markets and you

In my opinion, traders need to stay “cashless” into the early hours and on weekends. Investors who need to participate should reposition weights where exposure is greatest in areas benefiting from near inelastic demand. This is what the Fed is trying to do… destroy demand through a “reverse wealth effect”… This means that stocks must trade at reduced multiples and that other, even hard, assets such as real estate and precious metals could lose appreciable value , although perhaps not in relative terms as interest rates are rising and the US dollar is strengthening.

Areas I see as inelastic would be utilities, healthcare, national security, and cybersecurity. There’s more, but these are my areas of focus. Cybersecurity is still expensive, so this area is difficult. I bought the dip Tuesday and initiated new longs on two old friends…Northrop Grumman (NOC) and Palo Alto Networks (PANW). I intend to expand both positions, but honestly, who knows. As soon as I get into a fistfight, everything changes.



Everything has a reason. Slow down if you must.


All approaches, perceived threats, and targets of opportunity.


To changing environments. Become what is required, when it is required.


Find a way. Even with persistent failure. Learn constantly.


With the order. No beginning. No end. Constantly.

Yes you can. screwed up? Freaked out a few times? So be it. correct course. Keep fighting. See that little kid in the picture on your desk? The child thinks you are a hero. Be that hero. Be a shining beacon of all that is pure and good, even if you have never been. Be who the child thinks you are. Dedicate yourself to the task at hand. I know that if you get up well before the rising sun and read this, you are a force to be reckoned with. Now pull it up. Be yourself. Be powerful. Always.

Fear is only for the bad guys. So let the wicked tremble before us.

Sarge out.

Business (All Times Eastern)

07:00 – MBA 30 Year Mortgage Rate (Weekly): Last 5.94%.

07:00 – MBA Mortgage Applications (Weekly): Last -0.8% w/w.

08:30 – PPI (Aug): Expected 8.9% YoY, Last 9.8% YoY.

08:30 – Core PPI (Aug): Expected 7.1% y/y, last 7.0% y/y.

10:30 – Oil Stocks (Weekly): Last +8,844M.

10:30 – Gasoline stocks (weekly): Last +333,000.

the fed (All Times Eastern)

Fed blackout period.

Result Highlights (consensus EPS expectations)

Before opening: (DOOO) (2.63)

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