Stocks Are ‘Slow-Moving Car Wreck’ As Hard Landing Looms

Another disorganized session on Wall Street left investors searching for answers. Often enough, it feels like we don’t know what questions to ask anymore.

If the question is “Will there be a soft landing?”, the answer is “probably not.” The market seems to realize that, although rates are so chaotic it’s impossible to make definitive statements.

“We remain squarely in the flatten to reinversion camp as safe haven assets continue to rally,” BMO’s Ian Lyngen and Ben Jeffery wrote Thursday. “April’s CPI data has solidified Jerome Powell’s half-point hike guidance for June and July, as well as improving the odds for a September 50bps hike,” they went on to say, noting that “if an 8.3% headline consumer price index failed to push 10-year breakevens through 2.75%,” it’s not obvious “what impulse remains to press inflation expectations higher with the fallout from rate hikes not yet flowing through to the real economy.”

Bonds were bid again on Thursday, although this time the move was led by the front-end, with 2s some 8bps richer into the US afternoon. I doubt that’ll stick. It’s too early to price a Fed U-turn. But it’s not too early to price a hard landing, and in that regard, the decline in reals following CPI was notable (figure below).

On Thursday, 10-year reals were ~25bps below the highs seen just two days previous, but like everything else, the situation ended up muddled.

“Despite such a robust Fed rate hiking path being anticipated in order to tighten financial conditions to help kill-off the demand side of their inflation problem, Treasury Futs and ED$’s are seeing an extension of the recent sharp rally,” Nomura’s Charlie McElligott said. “It’s the implications of that policy tightening [for] the economy that’s driving a risk-off ‘growth scare’ dynamic,” he added. 

Hapless equities continued to trundle lower. Conspicuously absent, though, is the kind of capitulatory purge that might signal a bottom. For many, that’s frustrating.

Although the losses are piling up, there’s been no real “crash.” McElligott called the equity selloff a “slow-moving car wreck.” “The grinding de-allocation unwind hasn’t been ‘crashy’ enough to see Long Gamma really do much to hedge bleeding longs, so you just gotta ‘net down,'” he wrote.

Big-cap US tech was on track for one of the worst weekly losing streaks in history. The Nasdaq 100 was poised for a near 8% weekly loss, among the largest since the dot-com bust.

I’ve said just about everything I can think of to say about the situation. It’s bad. 20% in six weeks-type of bad (figure above).

Some of the sentiment bleed is plainly attributable to the $1.8 trillion wipeout in crypto. This week’s debacle has done irreparable damage to trust. To be clear, none of what happened is Bitcoin’s “fault,” but that’s not going to matter much to prospective new adopters. Additionally, the general investing public won’t be inclined to draw a distinction between an algorithmic stablecoin and a fully-reserved stablecoin. All the public will care about is the fact that something which was supposed to trade 1:1 with the dollar broke the buck. Stablecoins were already being scrutinized by lawmakers and regulators. That focus will intensify following the Terra mishap.

Readers have asked about contagion and systemic risk. As I wrote in response to several such inquiries (once in a comment and a handful of times over e-mail), banks don’t have much counterparty risk vis-à-vis decentralized finance. Nobody on Wall Street is losing sleep over obscure AMM tokens. Or at least I hope not.

However, I imagine margin calls are a factor, and as JPMorgan’s Nikolaos Panigirtzoglou noted, the sentiment channel is potentially important considering retail investor confidence was already shaken. “Contagion here is not via linkages between the crypto ecosystem and the traditional financial system, but via retail investors,” he said, in remarks quoted by Bloomberg. “If the $1 trillion capital loss in crypto markets causes broad-based retrenchment by retail investors in other risk assets such as equities, then that’s where the spillover is.”

Stocks attempted to claw back some losses late in the US afternoon. Jerome Powell was officially confirmed for a second term as Fed chair. The Senate vote was 80-19.