BTC is off over 7% this morning. It has spent the past two months in a flag pattern – a small channel which interrupts what in this case was a strong downtrend. It’s normally a continuation pattern, meaning that the downtrend is expected to continue following the interruption.
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Looking at the bounce since Jun 16, I can’t help but think of Chuck Yeager’s ill-fated journey into space.
Futures are up very slightly this morning, fixated on maintaining prices through tomorrow’s massive option expiration.
VIX: an excellent example of maintaining an even strain.
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Charts often explain the market’s moves in a way that data can’t. If I’m a central bank, market maker, large hedge fund or bank trying to protect its long book, I’m gearing up to slam VIX down below that dashed red trend line.
Depending on who’s pulling the levers, it might or might not be enough to stave off the reversal that was due at yesterday’s highs. This meltup might simply be market makers trying to dig out from under their massive options exposure (OPEX is Friday.) It could also be the Fed’s attempt to engineer a soft landing. It could even be the BoJ, ECB or SNB trying to protect their books.
It doesn’t really matter. The important thing to remember is that as obvious as the bearish case might be, the market is subject to a great deal of “interference.” Watch your back.
July retail sales came in at 0.0%, a goose egg, versus expectations that were generally around 0.1-0.2%. These data aren’t adjusted for inflation, however, so the “real” change was another drop.
Markets seem to care at the moment, with ES off nearly 1%. But, our charts had already called for a reversal yesterday after reaching upside targets across the board.
With Fed minutes coming out at 2pm ET and VIX still unable to push past the considerable suppression that has been applied at the 10-day moving average (20.51), bears should continue to exercise caution.
From a fundamental standpoint, this retail sales report is horrible. It’s disappointing because it’s flat rather than up, of course. But, it’s much worse because it’s not bad enough to sway the Fed from inflation fighting. We’ll get a peek at their minutes in a few hours, but suffice it to say this bad news is just plain ol’ bad.
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Housing starts missed again this morning, underscoring the NAHB’s assessment that the housing industry is in a recession. Starts came in 100K below consensus and 9.5% below June’s report.
Futures, still laser focused on OPEX, didn’t budge.
The NAHB posted the 8th monthly decline in a row yesterday, reporting the lowest reading since May 2020. This presents a thorny issue for the Fed.
Higher interest rates are bringing down prices as we anticipated over a hear ago [see: Time to Sell Your Home?] But, inflation doesn’t reflect housing prices, it reflects a goofy calculation known as owner’s equivalent rent – which is supposedly what you could rent your home for if you were so inclined.
Even this wackadoodle calculation shows that the latest spike is much higher and steeper than those which preceded the last two economic downturns/market crashes.
But, of course, it’s nowhere near the average 14% increases actually experienced nationwide. According to Freddie Mac, this has left 62% of Americans unsure about their ability to pay their rent over the coming year. Nearly 20% of those whose rent increased said they are now “extremely likely” to miss a payment. Then there’s foreclosures, which are up 143% from last year.
A cooling off of real estate prices would be desirable from the Fed’s standpoint as it might help mitigate high inflation. Yet, due to the COVID downturn, enough builders were more cautious that inventory remained below a 6-month supply until March 2022, when it began rising to June’s 9.3 month supply.
As the chart below shows, this is the same level seen in the lead up to the Great Financial Crisis…
Inventory topped out at 11.4 months in the midst of a 19% reset in prices. If the same percentage drop were to occur now, it would wipe out all gains since June 2021. Note that the median sales price has already dropped 12% so far.
Think about that for a moment. If you purchased a median-priced home in June 2021 ($374,700) and watched it rise to the median price of $457,000 in April 2022, that $82,000 in additional equity might encourage you to purchase a new car, take a vacation, or at least eat out more often. If that bump in your net worth were to vanish, so might your interest in spending.
When spending dries up, so do corporate sales and profits. As sales and profits drop, so does employment and stock prices. The resulting recession would thus be accompanied by a more severe market correction.
What builders need and want – lower interest rates – is not at all likely at this time, at least according to past and current Fed presidents. They have begrudgingly accepted the fact that sensationally low interest rates are what generated this disastrous inflation in the first place.
By raising rates just the right amount, the Fed hopes to tamp down inflation without causing a nasty recession. While technically not impossible, it’s never been done before. And, this Fed has proven itself fairly inept at reading the economic tea leaves.
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On the heels of a slowdown in China which was serious enough to cut interest rates, the Empire Fed numbers which came out this morning represent the second largest decline ever. It was expected to slip from 11.1 to 5.0. Instead, it plunged to -31.3, among the worst readings on record. Aside from the COVID crash, only Nov-Dec 2008 were worse.
Then, there’s Henry Kissinger – who knows a thing or two about global relations – who says we’re edging toward war with China and Russia.
Given all that, futures are off only slightly more than 1/2%. After all, Friday is OPEX.
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After a noteworthy reversal yesterday, we’re getting more of the same overnight gimmickry: “breakdowns” in VIX to facilitate “breakouts” in ES, even at the 5-min level.
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Annual headline PPI eased slightly in July, rising 9.8% versus June’s 11.1% increase. Monthly headline actually fell 0.5%, due largely to drops in oil prices. Core PPI remained elevated at 5.8% annually and 0.2% monthly.
As with CPI, the question remains whether inflation is rolling over or merely pausing.
With OPEX approaching, algos can’t be bothered such matters. Futures were off to the races again, perhaps catching the scent of the 200-day moving average just above…
…and enticed by an ever-decreasing VIX.
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Futures ripped higher on the news that July CPI came in 0.2% lower than expected on both the monthly and annual headline figures: 0.0% and 8.5%. Core rose 0.3% and 5.9% – still well above the Fed’s so-called 2% target.
Much has been made of the price drop seen in oil and gas since mid-June. But, it’s important to note that we’ve seen this happen several times before. The July YoY increase of 44.1% has been about the average low ever since Apr 2021, with several highs in the 60% range.
Prices would need to continue to decline in order for the YoY change in August to come in below 40%. And, our charts aren’t that all that convincing that oil/gas prices will continue to decline. Maybe if we had another COVID lockdown or a nice little recession…
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Futures are off moderately ahead of tomorrow’s critical CPI reading.
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