Market Disconnect

Europe Stocks Mixed; PMI Data... Also Mixed 

Stocks across Europe edged higher on Tuesday though the FTSE 100 was left behind as it shed around 30pts in early trading. European PMIs this morning – France manufacturing back into expansion, services dips deeper into contraction territory. Germany’s manufacturing PMI slipped further into contraction at 47.0 vs 48.0 expected, whilst services improved to 50.4 from 49.2 previously. So, a mixed bag – some good news, some worse, not a lot to really go on here and we know things are tough. German consumer confidence improved a bit as energy costs eased. The euro pulled back further from a multi-month high at $1.09265 struck in yesterday’s session as the PMI data emerged, dipping to the 50-hour moving average at $1.0867. UK and US PMI figures later along with the Richmond Fed mfg index.  

ECB's Lagarde Stands by Interest Rate Hike Plan 

ECB president Christine Lagarde is sticking to her guns, even if the mixed messaging from all the different members of the Governing Council lately has been utterly confusing. Speaking yesterday she reiterated that ECB interest rates will still have to rise “significantly at a steady pace to reach levels that are sufficiently restrictive, and stay at those levels for as long as necessary … In other words, we will stay the course to ensure the timely return of inflation to our target.” Lagarde probably reflects the consensus but the market has kind of given up on ECB communication since they began the year apparently trying to row back the hawkishness shown by Lagarde and the Council in December. ING with a big reset on its EURUSD call – citing recession fears in the US leading to a 100bps easing cycle in H2; the more positive energy situation in Europe; and China’s U-turn on Covid, which is better for Europe. ING expects EURUSD to hit 1.15 now – but still anticipates headwinds as questions remain over energy next winter. Right now it seems there is a fine line between the US eco data being bad enough to warrant some USD haven bid, and so bad that traders ditch the dollar on rates differentials.  

Fed and Market at Odds 

Across the pond, the gap between the market and Fed right now is huge. The market thinks there will be a soft landing, inflation cools rapidly and the Fed switches to cutting rates. Bulls think the Fed will pivot soon – we've been here before of course – but pricing something like 75bps of cuts this year implies an incredibly severe downturn in the US economy. Yes, inflation is coming down, but it’s still significantly elevated, and the hikes are now showing up in the real economy, but we are not yet looking at a total meltdown on Main St. The 2yr yield is down about 60bps in the last couple of months as markets trim expectations for how far the Fed might go and, more importantly, raise expectations for cuts later in the year. I’ve even read ‘one and done’, referring to a single, final 25bps hike in February.  

Market Optimism Misplaced? 

Wall Street rallied with the S&P 500 up more than 1%, and the Nasdaq composite climbing 2%. Garbage is leading the rally – Wayfair double upgrade from JPM sending the stock up 26%, now +81% YTD. PTON +43%, Zoom +7%, Roku +37%. Garbage collector ARKK is +25% YTD – all on the market betting that the Fed will slow earlier and turn to cutting this year. I don’t think that the market is reading this right. The macro is broken – but as I said in the Watchlist 2023 – higher inflation and recession “will not prevent market rallies on hopes that the Fed is finally done hiking”.   

In the Charts Today 

Consumers in the US are maxing out debt...  

...and saving less than ever  

I think we see that the consumer is going to be able to wear higher prices a lot less easily. Whilst inflation will prove to be sticky, we are starting to now pivot into a slightly different regime.  

Elsewhere, Japanese bond yields inched up again, gold made a new cycle high and Bitcoin pulled further away from Saturday’s 4-month high.  

SPX – closed more than 1% above its 200-day SMA, first such positive close since April, and the year-long trend line has been broken. 

Dollar (DXY) not quite testing last week’s lows but largely seems to be a bit of yen weakness seeping back into the mix – euro and sterling both hit multi-month highs yesterday before easing back a touch. 

Crude prices – attempted breach of the 100-day line, this now offering near-term resistance but bulls still in charge even though momentum is slowing.