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Our View
This morning is the CPI print, which is shaping up like a binary event. Of course, the FOMC rate decision is just a day later, so there’s a lot for investors to digest. If the number comes in hot — like the PPI number did on Friday — then the Fed will likely be forced to talk a hawkish stance, regardless of whether it goes with a 50 bps or 75 bps hike.
For what it’s worth, the market is pricing in a 50 bps hike (with odds of 73.5%).
Lastly, I’ll just say this: Everyone is talking about the Fed and inflation and no one seems to be talking about the $3.7 trillion in options expiring on Friday.
A few notes from this article stood out to me:
Tony Pasquariello, Global Head of Hedge Fund Coverage for Goldman Sachs' Global Markets Division, said he can't see the argument for lasting, significant upside: ‘With QT and negative earnings revisions just starting to really kick in -- alongside money market rates that are assuredly heading higher — we’re going into 2023 with a stock market that charges an 18 multiple for the prospect of 0% earnings growth.’”
That said, JPMorgan notes that, “If CPI prints 6.9% or lower, the print could be the technical end of the bear market.”
From the article linked above, the bull case also calls for a bit of a rebound year in 2023. At least for the 60/40 portfolio. Bonds are having one of their worst years on record, while the 60/40 is having its 7th worst year since 1900.
Of the prior 10 worst years for the 60/40 portfolio — ranging from -8% to -31%, while 2022 is at -13% thus far — only one time (1931) were the returns for next year negative. Further, only once were the gains limited to a single digit return, with the average and median gains standing at 13% and 17%, respectively.
Our Lean — Danny’s Take
On Monday, rates climbed 1.3%, the S&P rallied 1.4%, the dollar eked out a gain, the VIX jumped almost 10% and bonds (via the TLT) opened higher by 1.5% and closed higher by 0.32%.
Someone is wrong here and most experienced traders will tell you its equities, but we’ll see. Bret said last week we could be setting up for a binary event with the CPI and FOMC. That’s not unreasonable.
@sentimentrader “Traders have never spent so much on expectations for a crash. Last week, all traders across all U.S. exchanges bought to open $4.20 (lol) in put options for every $1 in call options. That's double what they spent during all the other panics over the past 22 years.”
I’ll just say this. It’s hard for markets to “crash” when everyone is gearing up for it.
Our Lean: