Stocks are essentially flat following a slight downward revision in Q1 GDP from -1.5% to -1.6% and export numbers which are truly circling the drain.
The disappointing data came on the heels of the worst consumer confidence reading since Feb 2021 and three (so far) Fed presidents advocating a 75 bps rate hike in July.
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The first quarter decline in non-farm productivity was the largest since 1947. The chart below from briefing.com shows the 7.5% plunge, contrasted with an 11.6% increase in unit labor costs. If the country had locked down during this time, you might be able to make an argument that a recession isn’t necessarily coming. 
But, this slowdown came courtesy of a 2.4% output decrease. In other words, it’s another reason to believe a recession is here and a soft landing ain’t in the cards.
Futures have been all over the map overnight, but are currently hanging on to the channel bottom from May 20. Note that we finally got that 10/20 cross and are nearing a backtest of the 50-day moving average – just in time to set up a nice trap.
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ES spent 11 hours hanging around our next downside target yesterday. While the session had many characteristics of capitulation, the fact that SPX didn’t quite reach significant support (3956) suggests that the overnight ramp is a head fake.
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Remember that scene in Cool Hand Luke where Paul Newman mouths off to the Captain after a failed escape attempt? He doesn’t initially appreciate the gravity of his situation. He is soon reminded.
That’s what yesterday’s post-Fed presser felt like. Powell was trying to convey the sense that the Fed means business. It is going to get serious about escaping the inflationary mess it has stepped in.
The market (well, the algos) didn’t hear that. They heard Powell say exactly what they expected and, spurred on by the huge bets lined up on the bearish side of the ledger, decided to mouth off.
Clearly, they don’t appreciate the gravity of the situation, as we were reminded by this morning’s labor productivity report – the worst in 75 years.
We would do well to remember that we’ve had these moments of euphoria before. The carefully curated decline which began in late March…
…has seen more than a few deviations of late.
But, facts are still facts. Inflation – especially very sticky labor costs – is still a problem, and the Fed waited so long that they now have no choice but to tighten into a recession. There was a time when they could have engineered a soft landing. But, that opportunity was, dare we say, transitory.
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Futures came roaring back into the falling white channel yesterday, revealing what many know but few say out loud: the market is broken. When expectations of a 1% quarterly rise in GDP yield, instead, a 1.4% decline, stocks should decline. Plain and simple.
The old “bad news is good news” argument doesn’t work any more because the Fed no longer has the ability (at least this coming meeting) to ease in response to a slowing economy. Perhaps they would have if they hadn’t squandered the opportunity to taper months ago, but that’s water under the bridge.
Instead, we get this massive disconnect which is, at the end of the day, a means of ramping stocks in advance of the bad news we all know is coming via the Fed’s meeting next week: a 50+ bps rate hike. Beyond monetary policy, which is now a headwind instead of a tailwind, we see more and more indications of tough times ahead. As Bill Blain (a treasure) sums it up:
The world is not what we think it should be. It is what it is…and that is getting less pretty.
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In our last update [see: Nov 30, 2021 Update on RUT] we noted that RUT had fallen by over 10% and dropped below its 200-day moving average – both bearish developments.
Yet, it had bounced repeatedly at a key Fibonacci level, the 1.618 extension at 2177.88. By repeatedly, I mean seven separate times where it dropped below 2177.88, then recovered back above it. To complicate things, it had closed that day just above another important Fibonacci support level at 2202.11. 
In the end, we left members with the simple advice:
If it drops through 2177, then I’d get short with tight stops muy pronto with a new target of 1918.77 (a 22% drop.) Otherwise, watch out for head fakes.
It should come as no surprise that RUT did eventually break down and reach 1918.77, but only after criss-crossing 2177 eighteen more times and rallying 9% into the end of the year. How’s that for headfakery?
RUT has now tested its new best friend 1918.77 over and over and over again. Its latest tag occurred earlier today. It closed at 1890.47, within 0.5% of its two previous cycle lows.
Now what?
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Futures are off sharply as we approach the open. Algos are responding to VIX’s pop back above its 200-DMA and the prospect of increasing Fed hawkishness. 
As we pointed out yesterday, the 10Y has again reached the top of a well-formed channel dating back over 30 years. Its ongoing decline has provided much of the fuel for increasing stock, bond and real estate prices, though, reversals at the channel top have marked severe downturns.
If the Fed prevents the 10Y from breaking out while continuing to raise short-term rates, the 2s10s will become even more inverted, validating recession forecasts. And, as we discussed last week [see: Should We Fear a Yield Curve Inversion?] the aftermath of these inversions has never been good for stocks.
Bottom line, the Fed is damned if they do and damned if they don’t. The real question surrounding today’s minutes is whether members will sound as bewildered on paper as they have in person.
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COMP’s breakdown caught a lot of people by surprise (though thankfully, not everybody.) Likewise, its bounce has turned more than a few heads. As it approaches a backtest of its channel line and SMA200, what can we expect? And what does it mean for the broader market?
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After Monday’s tumble, will Powell have the guts to stick to his inflation-fighting guns? Futures are up about 1.5%, but are still just shy of the 200-day moving average.
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10Y yields briefly poked above the Mar 2021 highs, adding to the drama surrounding next week’s CPI report.
Meanwhile, December NFP came in at +199K, less than half consensus, while the unemployment rate dipped to 3.9% and wages continued to strengthen. Remember, this was all pre-omicron.
Futures were not amused. While ES held its 50-DMA yet again, we get the sense it won’t be for long. 
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