Fed-speak unwinding hawkish ripples since Sept FOMC. Adding case for a downturn in yields = P/E expansion ahead = supports YE rally

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We discuss: how 10-yr yields are running out of reasons to rise at a time when Fed-speak has distinctively turned dovish.  And P/E multiples for stocks are just not that demanding.

Please click below to view our Macro Minute (Duration: 6:23).

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I agree with the views stated by Paul Tudor Jones, iconic macro investor, on CNBC Tuesday morning. He stated “this might be the most threatening and challenging geopolitical environment that I’ve ever seen” — he went on to explain that the unsustainable fiscal deficit coupled with geopolitical risks at the hands of unstable nuclear regimes does not make a great macro environment. The macro picture has been challenging since the start of 2022, and in 2023, arguably has deteriorated as the Ukraine war drags on and we have the political circus in the US, and now the Israel-Gaza war.

• However, equity markets have been dealing with this for 22 months now, and despite these headwinds, we are still constructive on stocks into YE. Over the past 5 trading sessions, the S&P 500 has shown a positive resilience not seen since late July (something we flagged last week).
• As we mentioned last week, these are signs of equity seller exhaustion. That is, the growing pessimism and risk control behavior means investors have been de-risking steadily since late July. And the signs of the end of this process is the fact:
  – Wed and Thu last week: markets opened soft and closed near highs
  – Friday jobs: “hot jobs” and markets reversed higher into close
  – Monday War: equity markets opened soft and reversed higher
  – Tuesday: equity market breadth expanded
• There are two big changes in the past week, in our view, that have provided new incremental support for equities:
  – first, interest rates are running out of reasons to relentlessly rise
  – second, Fed-speak in the past week is distinctly dovish, reversing Powell’s hawkish FOMC
• The day of the Sept FOMC (9/20), US 10-yr yields were 4.31% and post “higher for longer” presser, surged to 4.89%. An explosive rise in rates. This pressured equities and raised the probability for a hard landing, in the views of many economists. Since the peak last week, yields have now fallen to 4.64%, right near the 4.60% level that marks a 50% retracement (or downturn). Why are rates cooling off?
  – Israel-Gaza war adds downside risk to consumer confidence and economy
  – Oil has pulled back sharply from near $100 to mid-$80s
  – Plenty of signs of weaker US consumer
  – Sept jobs upside part-time jobs and wages weak
• Since Oct 2, 5 Fed-speak FOMC members have made dovish comments and many suggested the rise in long-term yields is providing sufficient tightening (of financial conditions) enough to end future hikes:
  – 10/2: Michael Barr –> dovish
  – 10/4: Richard Clarida –> dovish
  – 10/9: Philip Jefferson –> dovish
  – 10/9: Lorie Logan –> dovish
  – 10/10: Raphael Bostic –> dovish
• If this is what transpires, this would be bullish for equities. Why? This cycle is all about breaking the back of inflation, not breaking the economy. And inflation was fueled by many supply dynamics that are ending. Thus, the sooner the Fed stops hiking, the sooner the earnings recovery can start. I realize this is a minority view. But to us, this explains why stocks are up 14% this year.
• We get a lot of macro data this week including:
  – 10/11: Sept PPI (Wed)
  – 10/11: Sept FOMC minutes (thanks Tom Block)
  – 10/12: Sept CPI (Thu) and
  – 10/13: U Mich inflation (Fri)
• So there will be many incoming impacts to markets. But the reversal of the last 5 trading days is encouraging. The last 5 trading days showed markets rising in the face of bad news.
• Mark Newton, Head of Technical Strategy, also believes odds favor an equity low. In fact, he believes S&P 500 could rise to 4,607 in the next 3-4 weeks. This would be a violent and painful surge.

Bottom line: We remain constructive into YE and investors likely adding risk over next few weeks

It has been a rough period late-July to end of September. And a painful drawdown. As we highlighted last week, we sensed exhaustion in selling, based upon our many conversations. And we are seeing some confirmation this week with the softer VIX (17 yesterday), falling yields and cooling oil.

• given the drop in yields, we see the biggest beneficiary being FAANG/Tech
  QQQ 1.15%  META 0.57%  AMZN 3.74%  AAPL -0.43%  NFLX 1.11%  NVDA 1.39%  MSFT 0.97%  GOOGL 0.87%
• we also like Industrials given the bottoming of PMIs XLI 0.98%
• tireless Ken also identified some aerospace/defense stocks which could benefit from increase in wartime expenditures

Lastly, we all pray for quick resolution to this war and the protection of civilians and soldiers from needless tragedy. Sometimes, it seems like the world has lost its decency and humanity.

Fed-speak has become outright dovish…

Mark Newton sees 4,607 before a pause

Key incoming data October

•  10/2 10am ET September ISM Manufacturing Tame
•  10/3 10am ET JOLTS Job Openings August Hot
•  10/4 10am ET September ISM Services Tame
•  10/6 8:30am ET September Jobs Report Mixed
•  10/6 9am ET Manheim Used Vehicle Index September Final Tame
• 10/10 11am NY Fed Inflation Expectations Mixed
•  10/11 8:30am ET September PPI
•  10/11 2pm ET Sep FOMC Meeting Minutes
•  10/12 8:30am ET September CPI
•  10/13 10am ET U. Mich. September prelim 1-yr inflation
•  10/16 8:30am ET October Empire Manufacturing Survey
•  10/17 8:30am ET October New York Fed Business Activity Survey
•  10/17 9am ET Manheim October Mid-Month Used Vehicle Value Index
•  10/17 10am ET October NAHB Housing Market Index
•  10/19 8:30am ET October Philly Fed Business Outlook Survey
•  10/24 9:45am ET S&P Global PMI October Prelim
•  10/26 8:30am ET 3Q 2023 GDP Advance
•  10/27 8:30am ET September PCE
•  10/27 10:00am ET Oct F UMich Sentiment and Inflation expectation
•  10/30 10:30am ET Dallas Fed September Manufacturing Activity Survey
•  10/31 9am ET August S&P CoreLogic CS home price
•  10/31 10am ET October Conference Board Consumer Confidence

Key incoming data September

•  9/1 8:30am ET August Jobs Report Tame
•  9/1 10am ET August ISM Manufacturing Tame
•  9/6 10am ET August ISM Services Mixed
•  9/6 2pm ET Fed releases Beige Book Tame
•  9/8 9am ET Manheim Used Vehicle Index August Final Tame
•  9/8 2Q23 Fed Flow of Funds Report Tame
•   9/13 8:30am ET August CPI Mixed
•  9/14 8:30am ET August PPI Tame
•  9/15 8:30am ET September Empire Manufacturing Survey Tame
•  9/15 10am ET U. Mich. September prelim 1-yr inflation Tame
•  9/18 8:30am ET September New York Fed Business Activity Survey Tame
•  9/18 10am ET September NAHB Housing Market Index Tame
•  9/19 9am ET Manheim September Mid-Month Used Vehicle Value Index Mixed
•  9/20 2pm ET September FOMC rates decision Market saw Hawkish
•  9/21 8:30am ET September Philly Fed Business Outlook Survey Mixed
•  9/22 9:45am ET S&P Global PMI September Prelim
•  9/25 10:30am ET Dallas Fed September Manufacturing Activity Survey
•  9/26 9am ET July S&P CoreLogic CS home price
•  9/26 10am ET September Conference Board Consumer Confidence

Key incoming data August

• 8/1 10am ET July ISM Manufacturing Tame
• 8/1 10am ET JOLTS Job Openings Jun Tame
• 8/2 8:15am ADP National Employment Report Hot
• 8/3 10am ET July ISM Services Tame
• 8/4 8:30am ET July Jobs report Tame
• 8/7 11am ET Manheim Used Vehicle Index July Final Tame
• 8/10 8:30am ET July CPI Tame
• 8/11 8:30am ET July PPI Tame
• 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
• 8/11 Atlanta Fed Wage Tracker July Tame
• 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
• 8/15 10am ET Aug NAHB Housing Market IndexTame
• 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
• 8/16 2pm ET FOMC MinutesMixed 
• 8/17 8:30am ET Aug Philly Fed Business Outlook Survey Positive
• 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
• 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
• 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey Tame
• 8/29 9am ET June S&P CoreLogic CS home price Tame
• 8/29 10am ET Aug Conference Board Consumer Confidence Tame
• 8/29 10 am ET Jul JOLTS Tame
• 8/31 8:30am ET July PCE Tame
• 9/1 8:30am ET August NFP jobs report
• 9/1 10am ET August ISM Manufacturing

Key incoming data July

• 7/3 10am ET June ISM Manufacturing Tame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM Services Tame
• 7/6 10 am ET May JOLTS Tame
• 7/7 8:30am ET June Jobs report Mixed
• 7/10 11am ET Manheim Used Vehicle Index June Final Tame
• 7/12 8:30am ET June CPI Tame
• 7/13 8:30am ET June PPI Tame
• 7/13 Atlanta Fed Wage Tracker June Tame
• 7/14 10am ET U. Mich. June prelim 1-yr inflation Mixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Index in-line
• 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
• 7/25 9am ET May S&P CoreLogic CS home price Tame
• 7/25 10am ET July Conference Board Consumer Confidence Tame
• 7/26 2pm ET July FOMC rates decision Tame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services Tame
• 6/7 Manheim Used Vehicle Value Index May Tame
• 6/9 Atlanta Fed Wage Tracker April Tame
• 6/13 8:30am ET May CPI Tame
• 6/14 8:30am ET May PPI Tame
• 6/14 2pm ET April FOMC rates decision Tame
• 6/16 10am ET U. Mich. May prelim 1-yr inflation Tame
• 6/27 9am ET April S&P CoreLogic CS home price Tame
• 6/27 10am ET June Conference Board Consumer Confidence Tame
• 6/30 8:30am ET May PCE Tame
• 6/30 10am ET June Final U Mich 1-yr inflation Tame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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