Bear With Me

Yesterday’s “the Fed is getting on top of inflation” was today’s “the Fed is struggling to get on top of inflation.”

That’s if you need a narrative to explain inexplicable price action. Don’t get me wrong. There’s always an explanation. If you were omnipotent, you could map every transaction, determine the impact of each one and come away with the full story. But even the “best” AI isn’t capable of such feats (yet), so we’re left with stories. Sometimes they make a lot of sense. Sometimes not so much.

On Thursday, the only story that mattered was the simple one: Global shares were sharply lower (figure below). The good vibes engendered by confused post-FOMC jostling on Wall Street Wednesday were confined to early Asian trading. It was all downhill from there.

Correlation isn’t causation, but the Fed, the BoE and the SNB delivered 150bps worth of rate hikes between them over 24 hours. That’s a lot of tightening in one day, and there was no shortage of “they’re going to break something” banter on Thursday.

Another manic day in rates found US yields round tripping — and then some. Optically, it was a bull steepener, but it’s all tasseography at this point. The wild swings aren’t doing much to bolster confidence, that’s for sure, especially considering that a non-trivial percentage of traders have never witnessed yield swings of this magnitude in their professional careers.

“The steepening nature of the bullishness was a notable divergence from the trend that has defined US rates recently, even if most of the chatter on Thursday credited the price action with flow-driven position squaring after the Fed and ahead of the long weekend as opposed to anything fundamental,” BMO’s Ben Jeffery and Ian Lyngen said.

As for the S&P, we can call this a real bear market now. Thursday’s selloff brought the drawdown to almost 24% (figure below).

Big-cap US tech closed at the lowest levels since November of 2020.

Geopolitics aren’t helping. The Kremlin is curtailing gas flows to Germany and Italy, citing technical problems. If the curbs aren’t deliberate, as Moscow claims, the timing is some coincidence. Mario Draghi, Emmanuel Macron and Olaf Scholz were in Kyiv Thursday for a meeting with Volodymyr Zelenskiy.

To be sure, there is a technical problem. And it is related to sanctions. And the nature of the problem does underscore the extent to which sanctions are impeding logistics with the effect of disrupting supplies and driving up costs. But there’s also a technical solution which, so far anyway, the Kremlin has refused to pursue.

Reduced Russian flows are another headache for Europe at a time when already inadequate supplies were strained further by a fire at a key Texas LNG facility, which remained closed.

Soaring prices mean Moscow can live with lower volumes. Through mid-June, Gazprom’s exports were down 13% MoM. Shipments are down almost 30% YTD from the same period a year ago, according to Bloomberg’s math.

In any case, the war is an ongoing drag on market sentiment. If that’s all it is to you, count yourself lucky. For untold scores of people in Ukraine, it’s much more than that.

In the US, recession hysteria has set in. JPMorgan looked at the historical behavior of different asset classes around past recessions to derive simple, market-implied probabilities (figure below).


US stocks were pricing an 85% chance of a downturn, and that was before Thursday’s rout.

As the bank’s Nikolaos Panigirtzoglou cautioned, recession fears can become recession reality if they persist.

“Whether one looks at web searches or market pricing there appears to be heightened concern about the prospect of a US recession,” he said. That “by itself has the potential to become self-fulfilling.”

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6 thoughts on “Bear With Me

  1. Let face it, interest rates are, at the best of times, a blunt tool that likely is most effective as a preemptive strike against inflation. The Fed has basically admitted it is several months behind the curve and will do whatever it takes!
    If there was any doubt about an upcoming recession, the Fed’s action in June and their intent regarding additional interest rate hikes in July have most likely sealed the deal.
    As BTO, A Canadian rock band would say ( Yes I am from Canada!), You Ain’t Seen Nothing Yet!

    1. Another Canuck sub here; I suspect Heis has a lot of us and we were impressed at how well he understood the recent kerkuffle regarding the Governor of the Bank of Canada and our hapless Trump wannabee, Pierre Polievre.

      But something else caught my eye in the doom and gloom. Today the S&P closed at 3,666.77. On March 9, 2009, when the S&P bottomed in the Great Recession, the intra-day low was 666.79 Someone was probably displaying a macabre sense of humour when, recognizing the Biblical mark of the beast, they dusted off and pressed the buy button on their Bloomberg terminal. As we know history loves to rhyme, if not repeat. So we either contemplate that we are still 3K higher in 13 years and be happy or contemplate how much lower we still have to go to get a real bad sell off.

  2. If Biden Admin restricts/bans exports of gasoline and diesel then those prices will come down some and market will say we have seen peak inflation so Fed doesn’t have to increase unemployment and create a recession.

    1. Not sure that is really an option, US oil companies are not nationalized so that would have to come first I think. And even if we could do that to private companies in the US, it wouldn’t solve the issue so much as concentrate it outside the US (which would impact any shipment we receive from anywhere else, ultimately, cause boats and planes would need to fill up somewhere, right?).

    2. The natural gas/oil industries (excuse the pun) are both well oiled machines. If oil is being imported into the US, it is because the cost to purchase and bring it to its delivery point is less than local sources (which may or may not even be available). The heavy oil coming into US from Canada is a good example.
      Can you imagine the havoc if an US export ban on oil causes oil imports to these US refineries to stop?
      And stopping US exports? What are the oil companies supposed to do if local markets are fully supplied, most likely at lower prices? Can you imagine the reaction of US gas companies now shipping LNG to Europe being told you can not export?

      Governments reactions to crisis are often short-sighted and not well thought out. As an example, the US government’s attempt to control oil prices by releasing strategic reserves. How is that working out?

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