By Ven Ram, Bloomberg markets live reporter and analyst

US stocks have had a stunning quarter so far, the best Q4 since 1999! To expect them to continue rallying would to be wish for the Hailey’s Comet to keep appearing in quick succession.

The markets have been front-running the idea of a Fed pivot for some time now. While that is far-fetched, one must still admit that a Fed pause after its funds rate reaches circa 5%-5.25% is very much on the cards. While pretty much everyone in the markets is primed for the idea of a US recession, November’s non-farm payroll numbers (and perhaps even more importantly, the hourly earnings rising at twice the forecast pace) suggest that this inflationary episode may be around longer than realized.

And that is a worse denouement than any stock investor would wish. Not only do you have a scenario where inflation is corroding the nominal coupon on stocks, but you also have to factor in a slowing economy where presumably there is also a drag on earnings. A scenario that weighs on both the numerator and denominator (a high interest-rate recession) is hardly a prescription for a stellar rally month after month.

At current levels, the S&P 500 offers an estimated earnings yield of around 5.40% and the Nasdaq 100 around 4.32%, hardly anything to write home about in an environment where you can invest in two-year Treasuries that offer 4.27%.

Yes, there may be something to be said for being a part of that smart-money brigade that has made a grand return of 20%+ within a quarter and fleeing to where the honey is next, but that is predicated more on getting the timing right — an iffy proposition even with the most seasoned investors. For every one idea that works out as per plan, the nine that follow come a cropper.

As Benjamin Graham said, investment is most intelligent when it is most business-like, not when you treat the stock market as a casino, looking for the next big lottery that will offer massive returns overnight.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Who believed that central banks’ financial perpetual motion machine was anything more than trickery designed to generate phantom wealth?

Central banks seem to have perfected the ideal financial perpetual motion machine: as credit expands, money pours into risk assets, which shoot higher under the pressure of expanding demand for assets that yield either hefty returns (junk bonds) or hefty capital gains as the soaring assets suck in more capital chasing returns.

As assets soar in value, they serve as collateral for more credit. Higher valuations = more collateral to borrow against. This open spigot of additional credit sluices capital right back into the assets that are climbing in value, pushing them higher–which then creates even more collateral to support even more credit.

This self-reinforcing feedback of expanding credit feeding expanding valuations feeding expanding collateral which then feeds expanding credit has no apparent end. Modest houses once worth $100,000 are now worth $1,000,000, and nobody’s complaining except those priced out of the infinite spiral of prices and credit.

For those priced out of traditional assets, there’s NFTs, meme stocks and short-duration options. The credit-asset bubble-economy casino has a gaming table for everyone’s budget and desire to “make it big” via speculation, since the traditional ladders to middle-class security have all been splintered.

This financial perpetual motion machine distorts traditional incentives. Why bother renting a house bought for speculative gains? Renters are problematic, better to just let it sit empty and rack up huge capital gains.

Count the lighted windows at night in all those new condo high-rises. Are even 20% occupied? Probably not.

This is how you get a “housing shortage”: investors would rather keep units clean and off the market rather than risk renting units. When credit and asset valuations are both feeding an infinite expansion, all that matters is leveraging capital to acquire as many assets as possible to maximize the gains from this self-reinforcing wealth-creation machine.

This machine also incentivizes fraud. To really maximize gains, why not borrow clients’ capital? Indeed, why not?

But unbeknownst to the central bank sorcerers and the greed-crazed participants, all systems have limits and all consequences have their own consequences, i.e. second-order effects. There are many such dynamics which are eroding the apparently unbreakable financial perpetual motion machine.

One is debt saturation. Even low rates of interest eventually pile up consequential debt-service obligations, and any weakening in revenues, cash flow or income exposes the borrower to a cash crunch which can only be resolved by selling assets.

Another is the widening disconnect between financially sound valuations and “market” valuations set by rapidly expanding credit and collateral. Based on rental income or cash flow, Asset B is worth $200,000, but it’s currently valued at $1 million, and still rising. Obviously, traditional methods of valuation no longer apply.

But weirdly enough, they do. Debt service doesn’t matter when your collateral is expanding so fast you can borrow mountains of capital at “low, low prices” and not even consider debt service. But once collateral stops rising and interest rates start rising, suddenly all those absurd obsessions with cash flow start making sense.

But too late, too late: bubbles, regardless of how rock-solid the sorcery, tend to manifest symmetry: they fall at roughly the same rate and magnitude as they rose. As collateral declines, loans slide underwater as the asset is not longer worth more than the outstanding loan. Credit dries up and so does buying as greed-crazed buyers start worrying that perhaps the asset they’re about to buy might actually be worth less next month (gasp).

Liquidity and the credit impulse aren’t sorcery, they’re herd behaviors. When the madness of the herd switches from greed to panic, buyers disappear and thus so does liquidity–the ability of sellers to find a Greater Fool to buy the depreciating asset.

Greater Fools are soon wiped out and then there’s nobody left who’s dumb enough to buy assets that are in freefall and still far above any financially prudent valuation. The magic circle reverses, and as valuations fall, collateral shrinks and credit collapses. Lenders who greedily reckoned valuations and thus collateral would rise forever are stuck with life-changing losses–along with all the punters who built shanties of credit and leverage they mistakenly viewed as permanent palaces.

In making the economy dependent on the financial sorcery of self-reinforcing credit-asset bubbles, central banks and all the greed-crazed punters who participated have guaranteed a self-reinforcing death spiral as the “virtuous” self-reinforcing wealth-creation machine reverses into a self-reinforcing wealth-destruction machine.

Who believed that central banks’ financial perpetual motion machine was anything more than trickery designed to generate phantom wealth? Once the death spiral reaches its devastating end-game, the true believers will have fallen silent.

*  *  *

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Twitter chief Elon Musk joined a Twitter Spaces conversation on Saturday, saying Apple has “fully resumed” advertising on the social media platform, reported Bloomberg. 

The comments follow Musk’s rant against Apple, Twitter’s top advertiser, last Monday when he said the company threatened to remove the social media platform from its App Store without explanation and dialed back most advertising on Twitter. By late week, Musk visited Apple CEO Tim Cook and said the two had a “good conversation” and “resolved the misunderstanding about Twitter potentially being removed from the App Store.” 

On Saturday, Apple ads started reappearing on feeds, a clear sign the world’s most valuable company restated its advertising program. 

Musk was speaking to at least 2 million people on Twitter Space when he made the announcement but didn’t elaborate anymore.

Thank you Elon. We learned a lot. Here’s the full length Twitter space recording. Very important stuff. https://t.co/dU2YAxT9Sj https://t.co/WPemaxohjg

— Kim Dotcom (@KimDotcom) December 4, 2022

He also tweeted:

Just a note to thank advertisers for returning to Twitter

— Elon Musk (@elonmusk) December 4, 2022

Since Musk’s takeover, many companies have suspended advertising on the platform because they feel it is not a safe space for brands. 

However, Platformer News reporter Zoe Schiff said Amazon plans to resume advertising on Twitter at $100 million per annum, pending security tweaks to the company’s ads platform.

Amazon is also planning to resume advertising on Twitter at about $100m a year pending some security tweaks to the company’s ads platform, per a source familiar with the situation. https://t.co/VWQJX4HZEp

— Zoë Schiffer (@ZoeSchiffer) December 4, 2022

Reuters noted a recent letter sent by Twitter to advertising agencies offered incentives to increase their spending on the social media platform. 

Twitter billed the offer as the “biggest advertiser incentive ever on Twitter,” according to the email reviewed by Reuters. U.S. advertisers who book $500,000 in incremental spending will qualify to have their spending matched with a “100% value add,” up to a $1 million cap, the email said.

Apple and Amazon are restarting advertising campaigns on Twitter, providing further indications of de-escalation after chaos erupted on the social media platform as Musk rids it of censorship towards one that embraces free speech.

Authored by Adam Dick via The Ron Paul Institute,

Barbara Ferrer, the director of the Los Angeles County Department of Public Health, is once again threatening to reimpose a broad mask wearing mandate on people in the county, purportedly to counter coronavirus.

Of course, masks have never been shown to provide net protection against coronavirus and even most people who succumbed to the coronavirus fearmongering early on have happily turned their backs on masks, “social distancing,” isolation at home, and the rest of the pseudoscientific protocols that were thrust upon them before.

Nonetheless, some bureaucrats can’t help but keep grasping to reclaim the power that has slipped through their fingers.

Back in July, Ferrer threatened that a broad mask mandate would likely soon automatically swing back in force in the county because of increases in coronavirus “community transmission” numbers in the county – numbers the Centers for Disease Control and Prevention had singled out as important. She is back now with a similar threat.

As reported by ABC News out of Los Angeles, on Thursday “Ferrer said the mandate would be issued if two hospital metrics reach [Centers for Disease Control and Prevention (CDC)] thresholds — a daily average admission rate of more than 10 per 100,000 residents and a greater than 10% rate of staffed inpatient beds being occupied by COVID patients.”

Maybe people in Los Angeles County will luck out and not be subjected to the reimposition of the broad mask mandate because what ended up happening over the summer happens again: In July, the coronavirus numbers ultimately just missed tripping a CDC-inspired threshold, denying Ferrer her anticipated mandate.

But, it is a sad situation that people must continue to live under the shadow of threats to reimpose the buffoonish and authoritarian mandate.

Some tyrants will not give up on the new power they grabbed up in coronavirus crackdowns until they are forced to do so.

Authored by Paul Joseph Watson via Summit News,

Former Twitter censor Yoel Roth justified the site in its pre-Elon Musk incarnation banning satirical website The Babylon Bee, asserting that its content was “not funny” and “dangerous.”

Twitter’s former head of trust and safety made the remarks during an appearance on a Knight Foundation panel.

The Babylon Bee was suspended, or more accurately locked out of their account, for “misgendering” Assistant Secretary of Health Rachel Levine, a biological male who now identifies as a woman.

Their crime was to bestow upon Levine a “man of the year” award.

Despite Yoel Roth admitting that Twitter had made a mistake in banning a story about the Hunter Biden laptop scandal, he said the censorship of the Babylon Bee was perfectly reasonable.

“You can like the policies or you can dislike the policies, but it’s the same rules for everyone,” said Roth.

“When you repeatedly tweet violations of a policy there are consequences, including account timeouts, and ultimately, they can lead to suspension. And they did,” he added.

Yoel Roth, who no longer works at Twitter, claims that satire is dangerous and that Libs of TikTok and The Babylon Bee are dangerous. I’m glad he’s gone. He was bad for Twitter. pic.twitter.com/OTapsho3GO

— Ian Miles Cheong (@stillgray) December 4, 2022

Commenting specifically on the Babylon Bee issue, Roth asserted, “I want to start by acknowledging that the targeting and the victimization of the trans community on Twitter is very real, very life-threatening, and extraordinarily serious.”

“We have seen from a number of Twitter accounts, including Libs of TikTok notably, that there are orchestrated campaigns that particularly are singling out a group that is already particularly vulnerable within society,” he added.

“Not only is it not funny, but it is dangerous, and it does contribute to an environment that makes people unsafe in the world. So, let’s start from the premise that it’s fucked up,” said Roth.

That’s right, apparently, joking about the fact that there are only two genders makes people physically “unsafe.”

The Babylon Bee’s account was reinstated after Elon Musk took charge of Twitter, while Roth quit his position in early November.

As we highlight in the video below, the release of the Twitter files, data dumps proving targeted, political censorship of dissident voices and factual information, have left some fearing for Musk’s safety.

*  *  *

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By Peter Tchir of Academy Securities

Last weekend we published Positioning & Key Drivers. Much of the work on interest rates followed up on the previous week’s Rates, Risk & Taylor Swift, but we really wanted to highlight “positioning”, aka “the base”. Positioning has been forming the “base” for market moves in both directions.

The market’s response to Fed Chair Powell finally agreeing with us (they have to be much more cautious on rate hikes going forward) exposed the broader positioning in bonds and possibly equities. The rallies were strong, though I’d argue that the equities rally was less about positioning and more about people finally having to accept that the Fed has little interest in driving the economy into the ground. Powell’s message was not contradicted by other Fed speakers and was actually reinforced by them (all good for stocks).

There is some furious debate over Friday’s market behavior.

What Did Friday’s Price Action Tell Us?

Price action early in the week was quite obvious. We saw weak data come in, which was coupled with the Fed pulling back on their tightening narrative (terminal rate is probably still too high).

Friday saw stocks and bonds collapse after the Non-Farm Payroll data was released. The strong headline data wasn’t the key driver (though it had some impact). What drove the initial sell-off in stocks and bonds was the high and unexpected jump in average wages. That part is clear. What is less clear is why stocks and bonds reversed course (the 10-year came back from 3.63% to 3.48% and the S&P 500 e-mini futures rebounded from 4,007 back to 4,075 at the 4pm close). There are two competing theories:

• It’s all about the base. Positioning was so bearish that the market had to rally on news that just a couple of weeks ago would have sent it spiraling down. There is some logic to this, but there is little evidence that the market is so bearishly positioned. We can concede that the market isn’t overly bullish, but this “short covering panic theory” leaves a lot to be desired, at least for me.

• People questioned the data. For those of you who are sick and tired of reading T-Reports highlighting inconsistencies in the data (big focus on jobs and owners equivalent rent), you may have received many such notes from others this past week. My inbox and social media channels were filled with people questioning the jobs report. There was the now “obvious” discrepancy between the Establishment and the Household Surveys (the Household showed job losses). The data from 2 months ago got revised down (again). There were questions about the birth/death adjustment (was high in a period where other evidence showed that existing small businesses struggled, which isn’t typically a sign that new small businesses were being created rapidly). There were also questions about the historically low response rate (possibly due to timing of the survey and Thanksgiving). Finally, many people started to question if the new and improved ADP data isn’t the better data to watch.

Maybe neither explanation is correct?

No Trouble?

Maybe there are two other big factors influencing markets:

• The potential for some form of armistice, truce, détente, or something between Russia and Ukraine. While many members of our Geopolitical Intelligence Group see the slog grinding through the winter, there are three things that I think have changed, making some sort of peace more likely.

  • The U.S. election is over. Whether we like it or not, support of Ukraine was an election issue. This support had already started to break down along party lines. Why? I don’t know, but that is certainly my perception. So, with the election over, the ongoing cost of supporting Ukraine with weapons and aid will come to the forefront. The tricky question of “how does this end?” will rise to the top. Can we give Ukraine enough support to push Russia completely out? Possibly, but at what expense and where does that leave Putin and Russia?

  • Energy. It is the winter and energy needs are spiking. The West is set to impose more sanctions and there is something about price caps (which I admit I haven’t read, because they are so unlikely to work and far more likely to backfire). Russia, by all accounts, has done a much better job than the West in securing transport for their fuel (not shocking as we pat ourselves on the back about sanctions while they are busy working around the issues). The logistics of these new sanctions will cause the amount of transportation needed to skyrocket. Quite simply, energy markets used to be somewhat efficient. A delivered to B and C delivered to D because they were closer. If A has to ship to D and B has to ship to C, the distances are longer. Ships would be at sea for longer, reducing the number of shipments. For a lot of reasons, addressing global energy concerns may take precedence over what Ukraine wants (and possibly even deserves).

  • Winter. Winter was already mentioned in the energy discussion, but it plays several other roles. Academy’s GIG expects Russia to try to take advantage of frozen rivers to renew their attack on Ukraine. Russia needs to push west and all the rivers run north/south. At the moment, this forces the Russians to cross over bridges in very specific areas which are easily defended by Ukrainians with their highly capable weapons systems. Frozen rivers could help the Russians, but increasingly the efficiency of Ukrainian soldiers will make any Russian advance more difficult. That has led to targeting more and more infrastructure in Ukraine. Ukrainian winters are bleak at the best of times, let alone without the energy and raw resources needed to survive. The human toll will be bad for Ukraine even if they are technically “winning.” Finally, the forced migration of Ukrainians into Europe is placing unexpected burdens on the countries receiving those refugees. The longer the war and destruction lasts, the less likely people are willing or able to go “home” when it is all said and done. Winter will crystalize many risks.

  • China. China seems to be nudging Putin along. You could almost argue that Xi, when he met with Putin, gave him a “win it, or get out ultimatum.” Let’s not fool ourselves, China would be okay with a Russian victory, but they are tired of the daily headlines. Since Russia hasn’t achieved this victory there could be pressure on Putin (whose health is being questioned again in some circles) to find some “graceful” way out. Putin is a bully, but even bullies recognize bigger bullies and try to appease them.

• The end of China’s zero-COVID policy. This attracts a lot of attention and seems logical (at least from our perspective). It seems realistic that China will set in motion steps to have fewer and less severe restrictions after the winter (there is that word again). That should be good for global supply chains, but with inventory levels already too high, I’m not sure how much of a bounce can be expected from China shifting their policy.

Of all these narratives, I like the “peace” one the best (as you can tell by the time spent on that subject relative to others). If we get another big rally in stocks, it could be linked to developments on this front.

Mo Trouble?

We’ve examined no trouble, so what could cause more trouble? We covered this in more detail in Doesn’t Goldilocks Get Eaten in the End?, so we will just highlight the key issues.

• The Fed has already set the dominos in motion. The wealth effect and higher rates are bringing the economy to a screeching halt in some areas that will in turn impact others.

• The recession is coming sooner and will be deeper than expected (we will ultimately recover, but first we need to get through the recession fears).

• Quantitative tightening is like a nagging cough. It doesn’t seem too bad, but it certainly isn’t good, and you have to be worried about whether it will develop into something more severe. Without a doubt the Fed is committed to balance sheet reduction (because they now believe what I’ve believed all along – that QE affects asset prices directly and that is a big issue and one they want to resolve).

When does bad news become bad? My guess is soon, even after Friday’s reversal (remember, Friday’s NFP data wasn’t really “bad” in any traditional sense, so it’s difficult to garner much information on how the market will respond to truly bad economic news, especially on the jobs front).

The Pseudo-Random Wildcard!

I like using the term pseudo-random as opposed to random because it sounds “smart,” but is actually appropriate as I’m going to apply it to the trading of daily and weekly expiration options. The prominence of these very short-dated options should not be understated. Report after report comes in showing that volumes in these options are increasing and are a large part of all options trading. This includes not just open interest, but also the back-and-forth trading of these contracts. This literally sets us up for large gamma moves each and every day. Any significant move has a greater likelihood of triggering additional buying or more selling, rather than encouraging profit taking or dip buying. It’s a minefield out there wondering what price point triggers buying from those who sold options, which in turn risks pushing levels to the next option point. It is a massive wildcard in trading these days.

But it is not random. There are clearly strategies involved in trading these and just because I don’t understand them (yet) doesn’t mean we should ignore them.

I’m reasonably certain of two things about these short expiration options:

• They mostly amplify already large moves.

• They allow markets to shift from seemingly being overbought to oversold in record time (and vice versa).

In terms of learning more, this is an area that requires more study and better understanding.

Bottom Line

If it weren’t for my “hopes” that we will see some progress with Russia and Ukraine, I’d be in full anti-Goldilocks mode. Barring any positive news out of this war, I’d like to be in a “risk-off” position. Long/overweight bonds (especially in the 2-to-7-year part of the curve) and short/underweight credit spreads and equities.

Since this is what I believe most strongly, it is what I should do.

But, if you can’t beat them, join them, so I’d also buy some daily or weekly calls to benefit from any headline risk.

Maybe the “everyone is short thesis” is correct, but I’m still not there and don’t believe that last week really supported this theory. The moves were rational given the data (and guesstimating the impact of the short-dated expiration options).

On the Fed, I don’t expect them to backtrack, and I am looking for the data to drive the terminal rate lower.

It isn’t often that you can be in bearish mode with world peace as the risk against you, so hopefully we get that peace dividend and the daily call options pay off!

Facebook wasn’t the only company that received a tap on the shoulder from the FBI shortly before the New York Post‘s Hunter Biden laptop bombshell.

According to a declaration filed with the Federal Elections Commission (FEC) in December 2020, the FBI and several other agencies warned Twitter’s former head of Site Integrity, Yoel Roth, that “state actors” may attempt to leak hacked materials shortly before the 2020 election in an effort to influence the results.

According to Roth, the conversation happened during weekly meetings with the Office of the Director of National Intelligence, the Department of Homeland Security and the FBI.

“These expectations of hack-and-leak operations were discussed throughout 2020. I also learned in these meetings that there were rumors that a hack-and-leak operation would involve Hunter Biden,” Roth claimed in the declaration.

As the Daily Caller notes, it’s unclear when the discussion between Roth and the intelligence agencies occurred – but on Oct. 14, 2020 Twitter prohibited the story from being shared under the platform’s former “hacked materials” policy.

As we now know, the answer is much less nefarious; Hunter Biden, a crackhead, abandoned his laptop at a Wilmington, Delaware repair shop on April 12, 2019. The owner, John Paul Mac Isaac, walked into the Albuquerque FBI office, where he explained what he had, but was rebuffed by agents. He was told basically, get lost. This was mid-September 2019.

Two months passed, when two FBI agents from the Wilmington FBI office–Joshua Williams and Mike Dzielak–came to Mac Issac’s business. He offered immediately to give them the hard drive, no strings attached. Agents Williams and Dzielak declined to take the device.

Eight months later, Isaac provided a copy to then-President Donald Trump’s lawyer Rudy Giuliani, who provided a copy of the hard drive to The Post.

Of course, none of that stopped the New York Times from lying about it just recently.

Hey @grynbaum & all the editor at the @nytimes: the laptop was not stolen. You know this, you know exactly how it came into the possession of the repair shop. The only reason to continue to lie about this is cover up their complicity in burying the original story. This ran today: pic.twitter.com/QCjCaiR5JZ

— Derek Hunter (@derekahunter) December 5, 2022

In August, Facebook CEO Mark Zuckerberg admitted to Joe Rogan that the FBI warned the company about “Russian propaganda” shortly before the laptop story broke at the Post.

“Basically, the background here is the FBI, I think, basically came to us- some folks on our team and was like, ‘Hey, just so you know, like, you should be on high alert…  We thought that there was a lot of Russian propaganda in the 2016 election. We have it on notice that, basically, there’s about to be some kind of dump of that’s similar to that. So just be vigilant,” Zuckerberg told Rogan.

Zuckerberg expressed regret about suppressing a story that turned out to be the truth.

“Yeah, yeah. I mean, it sucks,” he said, before defending the platform for letting others share the NY Post story, unlike Twitter.

“It’s probably also the case of armchair quarterbacking, right?” replied Rogan, adding “Or at least Monday morning quarterbacking… because in the moment, you had reason to believe based on the FBI talking to you that it wasn’t real and that there was going to be some propaganda. So what do you do?” Rogan said. “And then, if you just let it get out there and what if it changes the election and it turns out to be bulls—, that’s a real problem. And I would imagine that those kinds of decisions are the most difficult.”

Mark Zuckerberg tells Joe Rogan that the FBI reached out to Facebook to put them on notice that the Hunter Biden’s laptop story was similar to the previous Russian Propaganda and to be on high alert #joerogan #MarkZuckerberg #JRE pic.twitter.com/ojZHhK3isa

— Giuseppe Mercadante (@itsmercadante) August 25, 2022

In late May, Sen. Chuck Grassley (R-IA) sought records from the DOJ regarding the work of Timothy Thibault, who was in charge at the Washington field office until late August – and was accused of sabotaging the Hunter Biden laptop investigation.

Thibault, among other things, made anti-Trump statements over social media in 2020 while he was helping to lead the FBI’s probe of Hunter Biden, while his father, Joe Biden, was running for the White House. The FBI boss also retweeted a post by the Lincoln Project which called Trump “a psychologically broken, embittered and deeply unhappy man.”

“Political bias should have no place at the FBI, and the effort to revive the FBI’s credibility can’t stop with his exit. We need accountability, which is why Congress must continue investigating and the inspector general must fully investigate as I’ve requested,” he told the Times in a statement.

Meanwhile, several FBI whistleblowers told Grassley earlier this year that agents investigating Hunter Biden “opened an assessment which was used by an FBI headquarters team to improperly discredit negative Hunter Biden information as disinformation and caused investigative activity to cease,” adding that his office received “a significant number of protected communications from highly credible whistleblowers” regarding the investigation.

Grassley added that “verified and verifiable derogatory information on Hunter Biden was falsely labeled as disinformation,” according to the Washington Examiner.

reminder: big tech effectively acts as a DNC PR operation. pic.twitter.com/LhYGNKy3q5

— Logan Hall (@loganclarkhall) August 25, 2022

Meanwhile, it appears that Twitter CEO Jack Dorsey was in the dark about what Yoel and General Council Vijaya Gadde were doing on behalf of the Democratic party.

TLDR: Vijaya and Yoel Roth censored the laptop under the guise of “hacked material policy”. Jack had no idea because he was probably off on some meditation retreat somewhere. And he has an email that will keep Twitter users *very* busy through Christmas. 💀 pic.twitter.com/Ni0KjNWXzn

— Autism Capital 🧩 (@AutismCapital) December 3, 2022

By Jane Foley at Rabobank

Shanghai has eased some of its Covid restrictions following the lead of Beijing, Shenzhen and Guangzhou, all of which have relaxed curbs in recent days in response to recent protests.  The news has provided support to risky appetite, leading Asian equities higher despite the poorer tone of today’s China’s November Caixin PMI data release.  That said, US and European futures have retained a mixed tone. 

Risk appetite was wrong footed by the strength in the US non-farm payrolls report on Friday.  Not only was the headline increase in payrolls stronger than expected at 263K, but earnings were also firm.  Hourly earnings rose by a surprisingly strong 0.6% m/m in November.  This was the biggest rise since January and gains were broad-based across sectors.  Bearing in mind the slower pace of activity noted in the US ISM report the previous day, this hinted at a stagflationary tone.  Treasury yields spiked and equity indices plunged in response to Friday’s Labour report, though the markets settled into the close and treasuries still ended higher on the week. 

Friday’s remarks from Chicago Fed President Evans underpinned the perception that the robust US labor market data are unlikely to up-end the expectation that the FOMC will move back to a 50-bps incremental rate hike when its meets next week.  That said, the continued tightness of the labour market should focus attention on the persistence of core inflation and the duration of the Fed’s policy response.  It is our view that the Fed will need to hold rates at the terminal rate until 2024. 

If President Biden was unapologetic last week about the protectionist tone of the US’s Inflation Reduction Act, European Commission von der Leyen has indicated that the EU is prepared to follow the same cue.  European politician and companies have been quick to point out that tax credits and subsides for products such as electric vehicles, which form the basis of the new law, give US-based companies an unfair advantage and could tempt business away from Europe.  Von der Leyen has suggested that “new and additional funding at the EU level” should be assessed and that the EU should “take action to rebalance the playing field”. 

US/EU relations have been going through a sour patch. Additionally, European Council President Michel may be about to stir up some dis-harmony within the bloc. The FT has reported that Michel is calling for a renewed debate on common financing within the EU.  His concerns relate specifically to the differing abilities of member nations to support industries embattled by the energy crisis.  His remarks coincide with today’s commencement of the EU’s ban of seaborne Russian oil imports.  Opec+ yesterday promised to be ready to take immediate action to stabilise the global oil market, if necessary, though it decided against making any changes to its production targets for the time being. 

On Friday, G7 nations together with Australia agreed to a USD60/b price cap on Russian seaborne crude after Poland gave its support.  The price cap is due to take effect from today or very soon afterwards.  Poland had pushed for the cap to be as low as possible to squeeze revenues to Russia and to limit Moscow’s ability to finance the war in Ukraine. Russian Deputy PM Novak called the move a gross interference which was in contradiction to free trade.  He stated that Russia is “working on mechanisms to prohibit the use of a price cap instrument” and that the country will only sell oil and petroleum products to those countries under market conditions”. 

In the UK strike action remains a feature.  Every day in December is expected to be marred by action of some sort over pay. Weekend talks between unions, train operators and the government had been labelled ‘constructive’, though a deal still proved to be elusive. Nurses and postal staff are among the other key workers due to take strike action this month. While UK political backdrop retains a calmer air since the start of PM Sunak’s premiership, neither the economy nor this own party are proving easy to manage.  Last week saw the opposition Labour party extend its majority in a Chester by-election. This news coincided by news that senior Tory Javid will not stand as an MP at the next election. A slew of Tories has already indicated they will throw in the towel at the general election rather than face the possibly that the party could be in opposition for some years.

Week ahead

A 50 bp rate increase from the BoC is expected on December 7.  On the margin this may further support expectations that the Fed will also feel more comfortable with the same size move on December 14.  Among this week’s US releases are final November PMI and durable goods data but also the December University of Michigan sentiment index and November PPI inflation.  The latter is expected to show a tapering off in the rate of price pressures, albeit at still uncomfortably high levels.  The European data calendar also contains final PMI readings.  In addition, German factory orders are due.  ECB speakers today include President Lagarde and Chief economist Lane is due to be heard later in the week before the blackout period descends ahead of the policy decision on December 15. Comments from ECB’s Villeroy yesterday indicate his preference for a 50-bps hike next week.  Up until recently market expectations pointed to a significant risk of a 75 bp move.  The RBA meets tomorrow and another 25-bps rate hike looks likely, though weaker than expected October CPI inflation data have focussed attention on the possibility that the bank may favour smaller incremental moves going forward. 

After the ugly manufacturing data, Services surveys suggests the pain in the US economy is spreading fast. US Macro surprise data has stalled in the last month and S&P Global’s Services PMI confirmed its flash print, falling from 49.3 in September to 46.2 in November. That is the fifth straight month of contraction in the Services PMI.

Of course, it wouldn’t be right if we didn’t get a farcical jump in the The ISM Services print just to “baffle em with bullshit”. ISM Services rose from 54.4 to 56.5 in November (well above the drop to 53.,4 expected)…

Source: Bloomberg

The ISM Services data remains the only signal still showing expansion (but we note that it also fell in November to its weakest since the COVID lockdowns)

Source: Bloomberg

Despite the hotter than expected ISM print, new export orders collapsed…

Source: Bloomberg

And somehow the ISM services jumped with 6 components weaker…

The S&P Global US Composite PMI Output Index posted 46.4 in November, down from 48.2 in October to signal a solid decline in private sector business activity. The fall in output was driven by a faster decrease in service sector activity and a renewed downturn in manufacturing production.

Source: Bloomberg

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

“The survey data are providing a timely signal that the health of the US economy is deteriorating at a marked rate, with malaise spreading across the economy to encompass both manufacturing and services in November.

The survey data are broadly consistent with the US economy contracting in the fourth quarter at an annualized rate of approximately 1%, with the decline gathering momentum as we head towards the end of the year.

“There are some small pockets of resilience, notably in the tech and healthcare sectors, but other sectors are reporting falling output amid the rising cost of living, higher interest rates, weaker global demand and reduced confidence. Struggling most of all is the financial services sector, though consumer facing service providers are also seeing a steep fall in demand as households tighten their budgets.

“A striking development is the extent to which companies are increasingly reporting a shift towards discounting in order to help stimulate sales, which augurs well for inflation to continue to retrench in the coming months, potentially quite significantly.“

So it appears S&P Global analysts finally discovered the reverse bullwhip effect we have been discussing for months.

After Powell’s words sparked panic-buying – and dramatic easing of financial conditions – some are wondering if The Wall Street Journal’s Nick Timiraos’ report this morning is an attempt top jawbone back the market’s dovish perception.

Federal Reserve officials have signaled plans to raise their benchmark interest rate by 0.5 percentage point at their meeting next week, but elevated wage pressures could lead them to continue lifting it to higher levels than investors currently expect.

…

brisk wage growth or higher inflation in labor-intensive service sectors of the economy could lead more of them to support raising their benchmark rate next year above the 5% currently anticipated by investors.

Timiraos comments come right after the Fed’s pre-meeting ‘blackout’ began over the weekend.

Timiraos’ comments pushed terminal Fed rate expectations higher…

And sparked selling in bonds and stocks. Treasury yields are higher (but obviously not in the same range as Friday’s chaos)…

The S&P mechanically retraced all of Friday’s losses, tagged the stops and has sunk since with futures now testing back below the 2090-day moving-average…

Specifically, Timiraos confirms what most Fed speakers have been saying:

They want to guard against raising rates too little and allowing inflation to resurge, or raising them too much and causing unnecessary economic weakness, according to recent public comments and interviews.

…

Some officials could seek to push through another half-point rate rise in February because they see a greater risk that inflation won’t decline enough next year. Without signs of slower hiring, they could worry that inflation could pick up again.

So why is the market still pricing in earlier and more rate-cuts next year? And will the next Fed statement crush that hope once again?