10Y bonds dollar S&P 500

What The Hell Is Going On With Stocks? Explanations Vary…

Who knows.

If there was one overwhelming theme pervading my inbox on Wednesday afternoon it was this: “I’m glad I’m not the only one.”

Apparently, not a whole lot of people have a rock solid, clean take on yesterday’s move in stocks which saw e-minis bounce some 2.7% off the post-CPI knee-jerk lows by the end of the session. We suggested equity investors are “going the wrong way!” (Planes, Trains And Automobiles reference), but then again “how do we know where they’re going?”, right?

Well, one thing we do know is that yields are still going higher (up near 2.93 on 10s now) and USDJPY is still generally going lower which, while seemingly counterintuitive when taken together, makes some measure of sense if you frame at as a “batshit fiscal policy” problem.


“Rates are moving higher on the perception there are clear signs of accelerating inflation and hence the bond bull market is dead and buried,” Bloomberg’s Mark Cudmore writes on Thursday, adding that “the U.S.’s structural deficits are apparently undermining the nation’s prospects, leading to an acceleration of reserve-diversification away from dollar assets [as] both interest rates and growth no longer drive currencies, and much higher U.S. real yields are now irrelevant, and hence so is inflation.”

There are a number of excuses you can give for why equities are acting like they’re acting and I’m not sure any of them are what I might call “satisfying.” In a separate note, Bloomberg’s Stephen Kirkland cites stocks’ ability to function as an inflation hedge, a weaker dollar being good for exporters, the gap between earnings yields and 10Y yields having widened back out, and fiscal stimulus, but again, I’m not sure any of that is sufficient to explain what we saw on Wednesday.

For whatever it’s worth, here’s BofAML’s take:

We think that coming into Wednesday’s data equity investors feared the US economy was taking off in a major way, which could force the Fed into a much more aggressive rate hiking cycle like in 1994. Recall that in 4Q 1993 US GDP growth accelerated to 5.4% from 2.0% (Figure 5), which triggered surprise Fed rate hikes starting in February 1994 and declining stock prices. Judging by Atlanta Fed’s GDPNow forecast for 1Q18 this was the exact same scenario that appeared to be playing out less than two weeks ago when the reading stood at also 5.4% (Figure 6). Although Atlanta Fed has come down the forecast was still 4.0% until Wednesday morning where the retail sales data lowered it to 3.25%. So now, while it does appear that inflation is accelerating, it appears much less likely that the economy is really taking off and forcing the Fed into a more aggressive rate hiking cycle. Hence, today ended with a relief rally in equities even though the inflation data was very strong. That also explains why counterintuitively the dollar ended lower on the day (Figure 4).


I mean, that’s all fine and good, but it seems like a stretch. That’s essentially arguing that everyone not only looked past the CPI print (something they certainly weren’t willing to do with the AHE number earlier this month) on the way to reading a dovish Fed into the weak retail sales number. I’m not sure I’m buying that and it seems even less likely when you consider how voracious the rally was and how quickly things reversed course after the initial dip in futures. BofAML’s thesis there seems a little leap-of-faith-ish as it is, and in the context of Wednesday’s huge reversal, it would constitute a damn bellyflop of trust in Fed gradualism.

Whatever the case, I think the above-mentioned Mark Cudmore probably summed things up best when he said the following earlier today:

Financial assets are trading on dissonant themes. That won’t sustain for too long so at least one sector is due some volatility in the days ahead.

22 comments on “What The Hell Is Going On With Stocks? Explanations Vary…

  1. Full retard is the only explanation.

  2. OldBeachBum

    I’m not a quant or a wonk. I’m the “dumb money” that you talk about from time to time. Even I can see the manipulation of the market by the big institutions. Just look for big buys of UVXY, followed shortly thereafter by a steady decline in the SP500 until some unknown target is reached at which UVXY is dumped quickly, followed by a reversal in SP500 fortunes. That’s just one example. I’m sure that VXX, as well as the short-VIX instruments, even the now-dead XIV, showed similar manipulations. Our financial institutions are burning this country to the ground.

  3. Stocks traded up because the CPI print was another month of low, unimpressive inflation. Only in the world of wall street strategists, unable to look more than a year behind or ahead, was this CPI a major beat. Sometimes historical context matters more than bullshit wall street estimates (startling revelation, right?). And the historical context over 30 years for CPI shows this months print to be low, even a deceleration from prior months, in an economy that remains stuck in the mud.

    • “…. Only in the world of wall street strategists, unable to look more than a year behind or ahead, was this CPI a major beat.”

      I see….

      Rudy, that was a 3-standard deviation beat in the post-crisis context. it was unequivocal.

      • broblawsky

        Yeah, this was the first time this cycle we’ve seen classic late-cycle inflationary behavior. It’s significant.

        • The PPI has the CPI’s back

          “The Producer Price Index for final demand increased 0.4 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices were unchanged in December and moved up 0.4 percent in November. (See table A.) On an unadjusted basis, the final demand index rose 2.7 percent for the 12 months ended in January.

          In January, the rise in the index for final demand is attributable to a 0.3-percent increase in prices for final demand services and a 0.7-percent advance in the index for final demand goods.

          The index for final demand less foods, energy, and trade services rose 0.4 percent in January, the largest advance since increasing 0.5 percent in April 2017. For the 12 months ended in January, prices for final demand less foods, energy, and trade services moved up 2.5 percent, the largest rise since 12-month percent change data were available in August 2014.”

      • So why can’t both assertions be true. It was a statistically-relevant deviation but on a grand scale relatively insignificant in comparison to overall income/capital distribution of the fruits of this economy. If GDP is 70% consumerism, but consumerism is throttled back by income/capital inequality, then tepid growth by the measures that we use is inevitable.

        Sorry, perhaps my “dumb money” brain just cant comprehend the subtleties.

      • No, no it wasn’t “unequivocal,” Heisy.

        1) You’re looking at month-over-month changes to SA core CPI. This is absurd, I’m sorry to say (cause I love you man!). MoM changes indicate very short term price movements. The average of the MoM changes will be extremely low, with a very tight standard deviation. So a “3-standard deviation” event, while sounding “significant,” simply isn’t. If you had bothered to actually graph the MoM changes in excel, you would see that January’s movement is unremarkable at best (but yes, it is a high standard deviation event!…which means nothing considering the data being used).

        2) Was there a 3-standard deviation event in the year-over-year change in core CPI? You know, the figure that might actually indicate that something major was afoot?
        Nope, I graphed it, calc’ed the stdev.p and average. Average y-o-y change in Non-SA Core CPI going back to 2000 is 1.99%, standard deviation is 0.46%. You know what January 2018’s y-o-y increase in Non-SA core CPI was? 1.82%, below the average since 2000, and so technically a -0.4x standard deviation event.

        Funny how data can be manipulated to say whatever you want. Wish I could embed the charts here so I could show you guys how silly your argument is.

        • Wow, this may really boil down to whether you buy into the Fed’s seasonal adjustments. Do you know what adjustments they make? Cause I don’t.

          If you chart SA MoM Core CPI, then the move looks big, but only because MoM moves back to 2005 have been microscopic. In 2005 and before, January’s move would have been completely normal. Meanwhile, if you look at “non-seasonally adjusted” core CPI, then January’s MoM and YoY moves are unremarkable.

          So basically this is a meaningful event only if you put on the ‘ole blinders and focus on MoM SA core CPI only, and choose to completely ignore YoY SA core CPI, MoM Non-SA core CPI, and YoY Non-SA core CPI (along with every other measure published by the Fed).

          Now maybe you guys can understand why you’re making a “mountain out of a molehill.”

          As Heisy would say….Nothing further.

          • Jamal James

            SA core CPI over the last six months is 2.57%. If core PCE numbers follow suit, the Fed will not be falling short of their dots.

          • I agree with a lot of what you said. MoM, seasonal adjustments, etc. But you don’t seem to account for the fact Fed will be reactive to MoM changes. Then throw in QT, yields, and fiscal stimulus. It’s very apparent that this whole thing is balanced on a blade’s edge, and one big upbeat could catalyze a significant short/medium term reaction. That’s all that matters at the end of the day; forward looking expectations vs actuals. Dismissing the MoM change as insignificant is extremely reckless.

          • broblawsky

            On a Y/Y basis for non-seasonally adjusted CPI (including food and energy), taking into account only post-GFC data, it’s an 0.46%-SD event. On a M/M basis using the same data, it’s a 1.32-SD event.

        • Ok, Rudy. Our recommendation would be to wait on a job offer from one of the bulge brackets. It should be coming any day now. Just keep checking the mail.

          • lol, been there, done that. There’s a reason they don’t manage money, and I do.

  4. Big Stevie

    Great article H, as usual.

    Having a rock solid, clean take on these kinds of moves is probably going to get even tougher as volatility picks up. It’s like trying to call the play-by-play on an avalanche…

  5. incidentally, Rudy is definitely right about one thing: there should be a way to embed charts in these comment streams.

    will try and fix that because that would definitely be a value add.

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