[Chart courtesy of MarketWatch.com]

1. Moving the markets

For the second day in a row, the markets rebounded sharply based on the idea that the Fed is due to pivot and implement a more dovish stance with its monetary policy. Never mind that all this is merely perception and not reality at all.

But to the frontrunning traders and algos none of that matters and reality is simply ignored, despite John Williams, President of the NY Fed, giving a speech, which included the following nuggets:

• Inflation is far too high.
• Our job of cooling demand and reducing inflationary pressures is not yet done.
• The drop in commodities prices is “not enough” to “bring down” the “broad-based inflation” caused by goods demand as well as labor and services demand.

Hmm, I don’t see a hint of a pivot and neither did other observers, leading Morgan Stanley’s strategist Mike Wilson to issue a host of warnings:

• Stocks will continue to fall even after the Fed pivots
• They will likely be headed lower for the foreseeable future, as volatility across equities, bonds, commodities, and currencies could remain elevated
• As interest rates continue to rise and the Fed keeps shrinking its balance sheet, it could risk provoking a crisis somewhere in the world, or even in the U.S. This is because higher interest rates create a drag on the U.S. economy by making it more expensive for corporations and households to borrow money, while a stronger dollar makes it more difficult for emerging economies to pay back debt denominated in dollars.

For sure, after the beating equities have taken this year, a periodic rebound is to be expected, and we have seen this pattern repeated throughout 2022, yet every time lower lows were subsequently made:

Will this time be different?

Analyst Graham Summers summed the outcome up like this:

The Fed will no doubt pivot at some point… but it’s not doing so now. And the market’s action has made the likelihood of a pivot MUCH lower.

So, enjoy the relief rally… but don’t plan on it lasting for long. Because the Great Crisis… the one to which 2008 was a warm-up, has finally arrived.

On the economic front, we saw the biggest crash in job openings on record (outside of global Covid lockdown), as ZeroHedge posted. Openings tumbled to just about 10 million from a revised July print of 11.1 million. Ouch!

Financial conditions eased as bond yields and the US Dollar fell, but ZeroHedge offered this caution, which goes along with the above:

However, if anything, the market’s action over the last two days makes a Fed pivot less likely any time soon. With both Treasury yields and the dollar falling, rate and liquidity pressures are much lower than they were last week… reducing the pressure on Powell to go full ‘Bank of England’… and round and round goes the big reflexive wheel of leverage.

Despite the violent market behavior of the recent past, the analog to 2008-2009 is still on target.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

After last month’s thrashing, during which the S&P 500 lost -9.3%, it comes as no surprise that a rebound from a very oversold condition materialized, as the markets welcomed October with a bullish bounce.

Following the recent debacle in the UK, when the BoE reversed its tough talk of hiking rates to fight inflation, by hurriedly starting a new QE program to stem the fall of its bond (gilts) market to bail out potentially failing pension funds, the rest of the world took notice.

It now seems that, despite tough talk to the opposite, the BoE, instead of proceeding with their Quantitative Tightening program (QT), folded like a cheap lawn chair, at the first sign of pain, by reverting to Quantitative Easing (QE)—inflation be damned.

The explanation that the BoE just wanted to maintain an orderly market was quickly rebuffed by analyst Peter Schiff:

Well, you can’t fight inflation and maintain an orderly market because the markets have been propped up by inflation. So, if you’re going to fight inflation, you’d better be prepared for a disorderly market. And until yesterday, the Bank of England was bluffing that they were. But now that their bluff has been called, they had to show their cards, and they’re holding nothing. And so, inflation won.

Peter added that, when the day of reckoning comes, he expects Fed head Powell to make the same decision:

I don’t care how much he wants to bark about being tough on inflation. At the end of the day, he will not bite. The Fed is a paper tiger, and it will fold just as quickly as the Bank of England when they’re confronted with an actual crisis.

And that’s what traders and algos were seeing as well, hence the sharp rally into October. Of course, at this time, it’s all guesswork and hope that Powell will follow suit, but what if he doesn’t?

Nevertheless, we saw stocks, bonds, crude oil, and precious metals surging, as the US Dollar and bond yields hit the skids. Silver soared about 9% today, while gold had great showing by gaining over 2% and reclaiming its $1,700 level again.

Will Powell pivot? As per ZeroHedge, FedSpeak by some his Fed Gov’s don’t seem to confirm that:

Tighter monetary policy has begun to cool demand and reduce inflationary pressures, but our job is not yet done.

What if we are in a new era — one in which we face inflationary headwinds?

History may be less of a precedent for appropriate policy.

As a result, our efforts to stabilize inflation expectations could require periods where we tighten monetary policy more than has been our recent pattern.

You might think of this as leaning against the wind.

Only time will tell if the Fed is bluffing.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

After yesterday’s breakdown in the UK Gilt (bond) market, during which the 30-year gilt rose above 5%, a level not seen since 2002, according to ZeroHedge, the Bank of England capitulated today and reversed course, AKA they pivoted from hawkish to dovish.

It recognized “significant dysfunction” in the bond market and “material risk” to financial stability by pivoting from QT (Quantitative Tightening) to QE (Quantitative Easing) by “carrying out temporary purchases of long-dated UK government bonds.” The result was interest rates coming off yesterday’s highs, a move that stimulated the bullish crowd and ramped up equities around the world.

While pondering what this all means, ZeroHedge summed it up succinctly:

Pivot means that central banks can’t take any more pain and will soon do QE and rate hikes at the same time everywhere, eventually ending hiking and starting to cut rates – the bottom line is that this is the beginning of the end for the fiat system which now faces a terminal dilemma: fight inflation and suffer market collapse and economic depression with millions laid off, or push to stabilize social order and employment with higher asset prices, runaway (hyper)inflation be damned.

The assumption now is, despite Fed evidence to the contrary, that all Central Banks will “fold and follow,” thereby ending the much-despised act of hiking rates and bringing back the main equity driver in form of rate reductions. That’s what Wall Street had been hoping for all along, but it remains to be seen if or when the Fed follows suit, which is the big unknown. If they fold now, their reputation will take another hit, as a surge in hyper-inflation will be the unavoidable result.

Helping today’s rebound was a sharp sell-off in the US Dollar, which helped gold to gain some 2%. Then Bond yields cratered, with the 10-year dropping almost 22 bps to close at 3.73%, after conquering the 4% level intra-day, which gave a much needed assist to equities. This was the biggest daily drop in 10-year yields since 2009, as ZeroHedge reported.

And, of course, no rally is worth mentioning, unless it’s accompanied by a short squeeze, and today we saw a massive one. The bulls were happy, although in terms of leaving bear market territory behind, we a have a long way to go (section 3).

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