The “summer rally bandwagon is growing.”
That’s according to BofA’s Michael Hartnett who, in the latest installment of the bank’s popular weekly “Flow Show” series, presented the situation as a simple equation. “Bears + ‘peak’ inflation + Fed ‘pause'” alongside “oversold assets” left the market “vulnerable to a tradable bounce,” he said.
Sure enough, US equities snapped the longest weekly losing streak in more than two decades ahead of the holiday weekend. The S&P rose the most since November 2020 (figure below).
Extremely subdued sentiment and risk-off flows presaged a bear market rally. Imagine that.
There’s considerable doubt about the Fed “pause” story but, as outlined here on Thursday, there’s a case to be made that the Fed, having made substantial further progress (there’s a policy joke there for the perceptive among you) towards tighter financial conditions, may be less inclined to incremental hawkish escalations. If that’s the case, it could set the stage for a reversal in trend trades, including shorts in equities and rates.
Last week, BofA’s Bull & Bear Indicator flashed an “unambiguous” contrarian buy signal. This week, it “crashed” (Hartnett’s word) further into “extreme bearish” territory (figure below).
“Oil is at sneaky new highs [which] tarnishes ‘peak inflation’ [and] crypto is limited-bid [suggesting] low speculative animal spirits, but UST volatility is off the highs” and that “was the epicenter” of the risk-off trade, Hartnett went on to write.
Friday’s key US personal income and spending data ostensibly supported the “peak inflation” narrative. But, as I wrote in the linked article, price pressures were evident in May, suggesting inflation might’ve reaccelerated, setting the stage for hot prints in and around the June FOMC meeting.
“Everyone knows inflation is peaking but the speed [it] falls is the wildcard,” London clients told BofA.
Meanwhile, dip-buyers were spotted in the latest weekly flows data (figure below).
The $20.6 billion inflow was the largest in 10 weeks, and put the brakes on a rapid decline in the four-week moving average. US shares saw nearly $22 billion in inflows.
Still, signs of angst weren’t hard to come by. The exodus from credit funds continued, and tech stocks saw a fifth weekly outflow, for example.
“We fade rallies,” BofA’s Hartnett remarked. “But not in a rush.”
Yesterday my local grocer slashed meat and fish prices in half ahead of the Memorial Day weekend. HomeDepot has appliances 20% off starting a couple weeks ago. Are inventories building because of supplies coming in faster or are people just not buying. Could we see commodities come down as fast as lumber went down last year after supplies caught up? Commodities tend to crash faster than they go up. This could end up as a tailwind for profits even as the dollar stays strong. With such a large middle class these days they are still spending and could spend the US right through this downturn.
Flo. I’m seeing the same sort of thing at my store, though my meat guy was moving Copper River Salmon at $40/pnd and it was flying out of the case. I think one reason for the inventory issues is that backordered products and supplies are now pouring in, weeks or months after they were expected and they have to be moved.
As I recall a point noted elsewhere in the Heisenberg Report, inventories were likely to be high because buyers from some firms made excess purchases as a cushion against supply chain issues and interruptions. It’s interesting to see the consequences play out as they occur in real time. Another consequence that I recall being referenced was an impact on profits due to lower pricing, which is necessary to move inventory because reports in the media about inflation discourage spending.
Isn’t this what Heisenberg has been talking about with the Fed? They will do whatever it takes to bring down inflation. Wouldn’t a sustained rally just make them more determined to increase rates? Nothing has changed in the “real” world; everything is sky high. I don’t think the average middle class person is buying $40 salmon….at least, not in my neighborhood.