Market Lab Report - Awful macro picture (rising yields, strong $) vs. short squeezes

by Dr. Chris Kacher

When pivot?

The continued dislocation in the bond market due to too many sellers of bonds and not enough buyers has resulted in rising yields. This pushes stocks lower. The canary in the coal mine could be what we just saw play out in the UK. Sooner than later, the Fed is going to have to pivot and go from being a net seller to a buyer of treasuries. 

Hot CPI

The owners' equivalent rent index also  increased 0.8% MoM, the largest increase since June 1990. On the other hand, initial jobless claims came in above expectations at 228k vs. est 215k. Inevitably, this metric should continue to increase as unemployment also starts to jump, at least if all of the prior recessions are any indication.

The CPI came in hot at 6.6% core vs. est 6.5% YoY, 0.6% core vs. est 0.4% MoM, and 8.2% vs. est 8.1% YoY. Shelter inflation 6.59% YoY, the highest on record, up from 6.24% in Aug. Rent inflation was up 7.21%, up from 6.74% in Aug, also the highest on record. The Shelter index rose 6.6% YoY accounting for over 40% of the total increase in all items ex food and energy- no surprise because as we've been saying, rent data flow through into CPI on a 6-9 months delayed basis.

Inflation keeps defying the economists' forecasts. People are still clinging onto the belief that inflation will fall. Yet the CPI showed inflation across major sectors such as shelter and medical care.

After the CPI report, CME Fed Futures now predict two 75 bps rate hikes for the rest of the year, bringing FFR to 450-475. Historically, the Fed has never hiked rates so aggressively, but then, the world had never seen so much debt due to C19 along with a multi-millenia year low in interest rates.

Short squeezes

Markets tanked but due to short covering and the hope of inflation coming off its peak created a massive reversal to the upside. This happened on Thurs Oct 13 where the major averages tanked then soared due to a short squeeze. This resulted in the fourth largest trading range on the NASDAQ Composite in its history. Fri then brought big selling as the market realized the macro backdrop looked as bad as ever.

CME futures are pricing in 75 bps rate hikes for Nov and Dec. Many mutual and hedge funds went short or bought puts. A short squeeze has been playing out so far this week. Earnings are coming in strong such as NFLX revenue beat as expectations have been reduced making the beating of lowered estimate targets easier. Perhaps we dead bat bounce until we get closer to the next Fed interest rate meeting on Nov 2 as we did during July-Aug earnings season, though this coupled with hopes of moderating inflation and a softer Fed produced quite the multi-week bounce from mid-June to mid-August. On the other hand, the Apr-May earnings season was met with gap downs in major stocks when a downtrend which started at the top of April was firmly in place. The downtrend was partly due to the Fed being increasingly hawkish. Hope remains that the Fed could soon become less aggressive on rate hikes as "stuff" is starting to break, but so far, all Fed members remain hawkish.