(Premium) FICC in Focus – September

What do we want to own?

That’s the question we ask ourselves every day. Stocks? Bonds? Commodities? Crypto? Cash? The answer doesn’t have to be like flipping a light switch. It’s not like we want to be all in on stocks on Monday, then all in on Treasurys by Tuesday afternoon. Instead, the answer to “What do we want to own?” evolves slowly over time. Our minds gradually change as new evidence comes in, and our decisions follow those slowly-formed opinions.

Stocks have been the place to be since last fall. There’s not much argument about that. In recent weeks, though, the tide seems to have turned in favor of other asset classes. Commodities are leading the way. Check out the ratio of the Invesco DB Commodity Fund (DBC) vs. the S&P 500 below. We’ve broken the downtrend line, momentum just reached overbought territory for the first time all year, and the ratio crossed above the 200-day moving average. It’s a bit early to definitively call this the start of a new uptrend, but at the very least, this year-long downtrend has weakened considerably.

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The Weekly Grind: September 11, 2023

Week in Review

Crude oil was the week’s big winner, climbing more than 2% to reach its highest levels of the year. That happened even as stock prices erased some of the prior week’s gains, led by a 1.9% decline in the NASDAQ Composite. The US Dollar index finished higher for the eighth straight week – only the third time it’s accomplished that feat in the last 40 years. The Dollar’s strength hasn’t been great for alternatives: Bitcoin had its lowest weekly close since March, and gold prices fell 1%.

Last Tuesday, Saudi Arabia decided to extend its current voluntary oil production cuts of million barrels per day to the end of the year. Russia extended voluntary production cuts of their own. Together, Riyadh and Moscow lead OPEC+, a consortium of oil producing countries that together attempt to influence the global oil market and maximize profit. The impact of OPEC+ production cuts on oil prices has a mixed historical record. Supply cuts are usually in response to weakening economic conditions, where declines in supply are often more than offset by an overwhelming drop in demand. This time, though, the group’s efforts are getting results. WTI Crude has risen from below $70 in June to almost $90 per barrel today.

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Waiting on Silver

We keep waiting on silver to take a leadership role.

Prices for silver and gold tend to be highly correlated, but silver tends to move in greater magnitudes. As such, when precious metals are rising, we expect silver to outperform. That’s what we’ve typically seen during gold’s best runs. These days, silver refuses to lead.

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(Premium) FICC in Focus – August

We’re experiencing a bit of déjà vu this month.

It seems like we’ve traveled back in time to 2022, when only two things seemed to matter: interest rates and the US Dollar. Those familiar foes have returned to the fore of the investment landscape, pressuring stock prices along the way.

Each time interest rose last year, the S&P 500 fell. And each time rates offered a reprieve, stocks rallied in relief. Look at how closely the two moved together:

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The Weekly Grind: August 14, 2023

Week in Review

The selloff in growth stocks continued last week, driving the NASDAQ to its first back-to-back weekly losses of the year. The Dow Jones Industrial Average managed to close higher for the week, but it’s still the laggard of the large cap indexes in 2023. The US Dollar Index rose for the fourth straight week, as did long-term Treasury yields. Crude oil also continued its recent run, rising for the seventh straight week to end at its best level since November.

Inflation data continued to show positive developments in last week’s report. Even though CPI rose modestly from the prior month’s 3.0% year-over-year print, the 3.2% reading was still better than most analysts had forecast. The increase didn’t shift expectations for short-term interest rates, either. Futures markets indicate that the Federal Reserve will almost surely hold rates constant at next month’s FOMC meeting and that they’re most likely finished hiking interest rates for the year. Still, there’s quite a bit more data to come before the Committee meets again. Hawks argue that core inflation is still well above the Fed’s 2% annual target. Doves can point toward shorter-term measures of core prices: the 3-month annualized Core CPI dropped all the way to 3% in June.

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Checking in on Energy Prices

The bears fumbled their opportunity.

Crude oil was vulnerable below $73. It even dropped as low as $63 one morning, before buyers stepped in to defend it. Now, prices are back above the first key level of resistance. That doesn’t mean we want to be aggressively buying oil here – at least not until we get above $83 and really show signs that a new uptrend is in place – but we can have confidence that the immediate threat of lower oil prices is now in the rearview mirror.

That’s what we wrote about crude two weeks ago in our Energy sector note. Since then, oil prices have continued to surge. We gapped above the 200-day moving average for the first time in almost a year, leaving sellers gasping for breath in the rearview mirror.

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(Premium) FICC in Focus

We keep waiting on silver to take a leadership role.

Prices for silver and gold tend to be highly correlated, but silver tends to move in greater magnitudes. As such, when precious metals are rising, we expect silver to outperform. That’s what we’ve typically seen during gold’s best runs. These days, silver refuses to lead.

Towards the end of last year, precious metals prices surged, with gold jumping from near $1600 to above $1800 by January. Similarly, silver jumped 30% from its October lows over that time. Gold prices continued to rise with the new year. Silver did not.

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The Weekly Grind: July 17, 2023

Week in Review

The Dow Jones Industrial Average closed at its highest level since last November as stocks continued their strong summer rallies. Even the Russell 2000 index of small caps has started playing along – it finished the week at the top of the leaderboard, rising 3.7%. Crude oil prices rose for the third straight week, and gold had its best week in two months, as the US Dollar Index dropped to new 52-week lows.

Inflation is moderating even faster than many of the most optimistic forecasters had anticipated. During June, CPI slowed to a 2.969% annual rate, less than half of the rate at year-end, and just one-third the rate from a year ago, when prices pressures were at their peak. That 3.0% annual rate is still well above the Federal Reserve’s 2.0% target, and it’s weighed down heavily by energy prices, which are unlikely to repeat the last year’s performance. However, shelter inflation (which accounts for roughly one-third of the CPI) has started trending lower, reversing more than 24 months of acceleration. And CPI ex-shelter has been running at the Fed’s target since last September.

Market Internals

Breadth was a concern for most market watchers throughout March, April, and May, as the rally in growth stocks obscured lackluster performances from value-oriented names during the spring. In June, though, the advance broadened considerably. Three-quarters of the stocks in the S&P 500 are in technical uptrends on short and intermediate-term timeframes. Even on a long-term basis, breadth is quite healthy. Fully two-thirds of members in the benchmark large-cap index are above their 200-day moving average.

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(Premium) FICC in Focus: Metals Meltdowns, Uninteresting Rates, and Some Eye-Catching Developments in Currencies

The Federal Reserve held rates constant at this month’s FOMC meeting, an unsurprising outcome after the latest CPI report showed price pressures continuing to moderate. The quarterly Summary of Economic Projections showed that the median Fed participant sees two more quarter-point hikes by year-end. That would imply a terminal rate of 5.50%- 5.75% for this cycle, and the highest Fed Funds rate in 20 years.

Jerome Powell spent this week reinforcing his view that more hikes are on the way, but the recent decision to not raise rates after doing so at every meeting for more than a year is a clear signal that this hiking cycle is nearing its end. Modest changes to the terminal rate aren’t the same as what happened in 2022, when the Fed went from talking about one 0.25% hike at year-end, to implementing the fastest tightening cycle in 40 years. Here’s a brief recap of the timeline for those that have blocked last year’s turmoil from their minds:

Of course, inflation could always surprise us by reaccelerating. (We aren’t economists, after all, and, even if we were, we’d probably be terrible at predicting the path of future activity. The latest GDP report proved that even predicting the past can be quite perilous.) If it does, the Fed may well respond by tightening policy to a level that no one expects.

For now, the market is discounting the likelihood of that scenario. Inflation was a problem for asset prices last year because higher inflation meant higher interest rates, and higher rates meant a stronger US Dollar. We shared with our subscribers many times an overlay of Treasury yields, the US Dollar Index, and the S&P 500 index, pointing to how tightly correlated the 3 were.

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The Weekly Grind: June 20, 2023

Week in Review

Stock prices rose for the fifth straight week, matching the longest streak since 2019. The NASDAQ continues to dominate equity returns this year: it’s up more than 30%, while the Dow Jones Industrial Average has risen a paltry 3.5%. Crude oil recaptured some of its year-to-date losses by rising 2%, while gold and bitcoin both fell. For Bitcoin, prices are now at the lowest level since March. The US Dollar dipped back into negative territory for the year, and interest rates rose modestly.

The Federal Reserve held rates constant at last week’s FOMC meeting, an unsurprising outcome after Tuesday’s CPI report showed that price pressures continue to moderate. The quarterly Summary of Economic Projections showed that the median Fed participant sees two more quarter-point hikes by year-end. That would imply a terminal rate of 5.50%-5.75% for this cycle and the highest Fed Funds rate in 20 years. Notably, the SEP showed expectations for a rate cut sometime next year, even while inflation remained above the 2% target rate in those forecasts. Fed Chair Jerome Powell justified this by saying that he’s targeting a level of real interest rates, so he anticipates rates will need to fall with inflation after they’ve reached a sufficiently restrictive level.

Market Internals

Market breadth continues to improve as the stock rally extends. On each 20, 50, 100, and 200-day timeframes, the majority of S&P 500 stocks are now above their moving averages. The opposite was true a month ago.

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