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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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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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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We’ve been used to the bad news is good news meme for such a long time, it feels weird to even type that. That’s the reality, however, when investors are already counting the days till the Fed’s easing cycle and we get 528,000 new jobs instead of the 258,000 expected.
The tightening might just have to last a little longer than the bulls have suggested. Though, the efforts being made to lower oil prices are bound to start paying dividends in the longer run. CL reached our next downside target. 
Could this slide turn into something real? Could ES do something so drastic as drop below its 10-day moving average? Can VIX survive the usual 9:30 smackdown?
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Markets are flat following yesterday’s 1.5% move higher engineered by a stunning 12% VIX smackdown off Wednesday’s highs.
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Another Fed meeting, another VIX-driven algo meltup.
But, something’s more than a little sketchy about this one – aside from the fact that the recession which Powell refused to acknowledge yesterday just got closer to being official.
It might be shallow, but the 0.9% drop in Q2 (first estimate, vs +0.5% consensus) makes for two quarters in a row – the commonly accepted definition of a recession.
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Futures have ramped almost 1% overnight – a common occurrence lately, especially in advance of a Fed decision.
Even the durable goods orders beat (a miss if you’re looking for the Fed to slow their rate hikes) did nothing to thwart the algo-driven meltup.
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Gasoline futures (RBOB) have reached our 200-day moving average target set on March 3 [see: The Devil You Know] after having broken out of a falling flag pattern. Then…
…nothing would be as effective at punishing Russia and helping to solve the inflation problem as crashing the oil market…If oil does retreat, stocks should too. Reversing at the .786 would be a good start……as would RB reversing at its 1.618.
…and now.
By falling 33% since then, RB has given the economy several gifts, chief among them the opportunity to bring inflation down – if retail follows suit. EIA reported 4.272 per gallon for the month of March. July is shaping up as 4.41 – a tiny drop compared to futures prices.
The YoY increase in retail prices would remain elevated at 45%, down from June’s 60.7% but in line with average increases during Mar-May, when CPI averaged 8.46%.
Even if RB were to decline further, it face falling comps from August 2021. Retail prices remained steady from July to August. So, the onus is now on retailers to make a difference. And, something tells me they’re rather enjoying their windfall profits.
The top five oil companies – Shell, ExxonMobil, BP, Chevron and ConocoPhillips – saw their Q1 profits triple from 2021 to 2022. ExxonMobil, for instance, netted $2.7 billion in Q1 2021 and $8.8 billion in Q1 2022. It is expected to report over $10 billion in Q2. Taking into account futures prices, it is obvious that the Russian invasion of Ukraine has provided cover for what’s really just good old American greed.
Meanwhile, equities markets are trying to make sense of the ECB’s 50 bps rate hike (all the way up to zero!)
Hate to tell you, Ms. Lagarde, but 0% in an 8.6% inflationary environment with a 2% inflation target is still wildly stimulative – not to mention delusional.
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Yesterday’s mind-bending rally made very little sense except for the fact that it both washed out many more weak bears and resulted in a more logical placement of ES’ downside target. 
I’ll explain.
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