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Another day, another yield-driven market shock, and another down day for the S&P which is now lower for 6 consecutive days, the longest stretch since February 2020 when the world was about to shut down (worse, as the last chart at the bottom of this post show, stocks are now officially in meltdown pattern mode… read on).
For those who don’t see the pattern yet, it’s simple: with central banks seeing who can outhawk each other the most every day, even as their governments vow to go into a debt-funded fiscal overdrive at a time of rising rates and QT, yields are predictably surging, and real yields are surging even more with real 10Ys hitting 1.63% today, the highest since April 2010. And since real yields track fwd PEs, it’s getting uglier and uglier in risk land. Alas, it will likely get much uglier, as fwd PEs could drop as low as 12x.
Throw in some mild recession E of around 200-210 and you end up with S&P around 2400, a 50% drop from the market’s all time high this January.
Of course, it’s unlikely that the Fed will allow all of its wealth effect legacy to be wiped out just because it can’t grasp that CPI and PCEs are backward-looking data sets, but at the current pace stocks still certainly keep making new closing 2022 lows until the Fed is confident that inflation has been defeated (which of course is idiotic since the moment the Fed pivots, all commodity hell will break loose).
Still, even though stocks are tumbling the story for the past week has not been equities, but rather bonds and soaring yields: after all, just earlier today – after the latest dismal 5Y TSY auction – 10Y yields rose above 3.99% and while they have since eased a bit, it is almost certain that we will have a 4-handle on the 10Y at some point tomorrow…
… just like the 30Y gilt earlier today rose above 5%, a level not seen since 2022 in what may be the scariest bond chart a generation has ever seen.
The big question is how much longer can the Vix, and stocks, ignore what is going on in bond land, and which way will this historic divergence close: with MOVE collapsing (i.e., QE) or with VIX exploding higher (i.e., a 2008-like global crash).
And while we wait for the answer, we should note that the Bloomberg dollar index once again caught a bid, because just as it seemed like foreign denominated USD-creditors may finally get a break, the dollar spiked higher and was set to close at a fresh record high for the sixth day in a row.
Any other day this ongoing, crushing meltup in the dollar would have been sufficient to nuke oil, today news that Russia had proposed a 1mmb/d output cut for the OPEC+ cartel was enough to prop up the energy sector…
… even if there was nobody to prop up cryptos, which after mysteriously surging yesterday as everything else crashed, tumbled on Tuesday back to pre-meltup levels.
But while we have seen the movie above on many previous occasions, the big risk – and where things are really starting to break – is in credit land with the Investment Grade tumbling to a fresh post-Lehman crisis low.
Perhaps the market is starting to notice that something will break very soon at this rate, and as a result after hitting 90%, the odds of a 75bps November rate hikes have slumped to just two thirds, the lowest since last week’s rate hike.
Something tells us that these rate hike odds will tumble sharply over the next month, because as someone pointed out on twitter, the S&P 500 has dropped at least 0.75% for 5 straight days to a 52-week low…. and then dropped again.
That only happened during the meltdowns in 1932, 1974, and 2008…and today.
If the historical pattern holds, it is good news: we are very close to the bottom… the bad news: there could still well be a lot more pain in the next 1-3 months, but by month 6 we should be in the clear. In other words, Hartnett’s forecast that the bear market may trough some time in October looks increasingly spot on.
And while Powell may pretend – and even believe – he is Volcker 2.0, once the pitchforks appear in front of the Marriner Eccles building, and once millions of Americans are laid off every month, we doubt the former millionaire private-equity lawyer will have any interesting in perpetuating this hilarious charade.