Market Lab Report - Hawkish vs dovish events

by Dr. Chris Kacher

Isolationism

The increased global conflicts, civil unrest, soaring credit card debt, higher interest rates, and persistent inflation, especially in essentials like food, energy, healthcare, education, and housing, are raising the likelihood of stagflation. Moreover, the trend of countries becoming more isolated is evident in today's socioeconomic landscape. A recent example of this is the trade tensions between the US and China, particularly the competition over advanced generative AI chips. These tensions have resulted in companies like NVDA being unable to export their high-tech chips to China, fracturing the critical supply chain. This disruption is concerning because chips, much like water, are essential for technological progress. Ultimately, this could have a negative impact on corporate earnings.

We have had three hawkish news events hit the markets:
1) While the PPI came in hot at 0.5% vs. est 0.3% MoM and 2.2% vs. est 1.6% YoY and core PPI came in at 0.3% vs. est 0.2%, the CPI also came in above expectations at 0.4% MoM vs est 0.3% and 3.7% YoY vs. est 3.6%. CPI core matched expectations at 0.3% MoM and 4.1% YoY.
2) The Fed minutes recently released signaled the central bank plans to keep policy "restrictive" as expected. Powell most recently maintained that rates have likely peaked but remains data dependent.
3) An additional $100 billion has been requested to fund Ukraine and Israel. This may indirectly create more money printing thus more inflation which will increase the odds of another rate hike. But in the meantime, any additional liquidity can fuel stocks.

US liquidity continues to rise, presumably as stealth money printing continues. China had also increased its liquidity.


One dovish event:
1) Some members including the hawkish ones suggested the surge in Treasury yields has reduced the need for further rate hikes.

In consequence, the CME FedWatch remains roughly the same at the time of this writing with no further rate hikes and the first 25 bps rate reduction in June 2024.

Bearish data: 
Treasury yields and the dollar remain in firm uptrends. This suggests the Fed will have to hike at least one more time. Further, due to the precarious nature of banks, pensions, and IRAs which remain vulnerable to rising rates, something else could break. This could push markets briefly lower before the Fed steps in and prints once again. But it makes no sense to try to predict the timing of such events.

What we know right now is the major averages continue to make lower highs and lower lows. Both the S&P 500 and NASDAQ Composite are struggling below their respective 50-dmas. The current bounce in the major averages was due in part to short covering and an excessive amount of bearishness by hedge funds and retail investors. The outperforming MMANGA tech juggernauts have been in corrections though only AMZN and NVDA are trading below their respective 50dmas. MSFT, AAPL, and AMZN have made lower highs and lower lows while META and GOOGL are making higher highs and higher lows. This is a change from earlier this year when these names were all in sharp uptrends. The tone of the market therefore remains more bearish than bullish at the time of this writing.

We will continue to monitor the price/volume action of the major averages and tech juggernauts to monitor buying and selling pressure in the days ahead.