Best week of the year for stocks and bonds, 2nd worst week of the year for the dollar...
*S&P 500 CLIMBS 5.9% FOR WEEK, BEST SINCE NOVEMBER 2022 https://t.co/yvljHlo4XR
— zerohedge (@zerohedge) November 3, 2023
A smaller-than-expected (and less duration-extended) Treasury-Refunding kicked off this week's chaos, sending bond yields careening lower (and exciting long-duration stocks). A less-hawkish-than-expected Powell helped and weaker-than-expected macro data (bad news is good news) stoked the fire more to prompt a massive short-squeeze in both stocks and bonds.
That helped propel expectations for 2024 Fed rate-cuts dramatically higher, from 67bps of cuts to 110bps now priced in next year...
Source: Bloomberg
Significant softening in global macro data this week:
German recessionary data: Retail Sales miss, Flash GDP turns negative on drop in consumption, German inflation data makes a two year low
Eurozone flash (dis)inflation continues to fade with more “downside surprise,” making a two-year low and evidencing further confirmation of European economic contraction, especially with deeply negative ECB Bank Lending Survey, showing that Credit Demand is drying-up meaningfully
Chinese contractionary Manu PMIs did the same
UK Manu PMIs contractionary downside surprises as well
Canada GDP print a back-to-back contraction in Q2 and Q3
And then quite most importantly signs of a turn in US data...with a soft Manufacturing ISM which further fed the Treasuries squeeze earlier in week...then followed by this morning’s CRITICAL Labor / Wages data, with headline NFP “miss,” a prior down Revision of over 100k, and weaker AHE... massive, esp when adding in the Service- and Composite PMI “miss” along with the ISM Services and Employment downside prints too
Global growth scare?
Source: Bloomberg
Domestically, US macro serially disappointed as the impact of recent tightening financial conditions starts to weigh on the economy...
Source: Bloomberg
However, the headline macro index is misleading as it includes 'soft' survey data which has been - until this week - surging in the face of plunging 'hard' data. 'Hard' data is at its weakest since Oct 2022...
Source: Bloomberg
But, Financial Conditions eased dramatically at the end of this week (the biggest weekly easing since March) with the post-FOMC/TSY-Refunding collapse in yields sparking the biggest 2 day easing in a year...
Source: Bloomberg
All of which completely screws up The Fed's cunning plan to "let the market do its job".
When Powell hinted at The Fed being 'done', he unleashed a wave of buying in bonds, stocks, credit (and USD weakness) all of which eased financial conditions dramatically... much more of this and The Fed will be forced to actually do its job and hawkishly push back.
In other words, markets should stay range-bound as The Fed and The Market trade off the 'job' of tightening financial conditions.
As Nomura's Charlie McElligott notes, The Fed will soon risk the hilarity of “too much FCI EASING” which then risks UPSIDE surprises to data if it re-jiggers “Animal Spirits”...and may need to “talk it tighter” again soon, especially with the lone standout “upside surprise” today being the ISM Services Prices Paid BEAT.
For now, as we have warned, negative/bearish positioning helped spark a massive surge in stocks this week with Small Caps up over 8%. The Dow was the biggest loser, only managing a measly 5% gain on the week with Nasdaq and S&P around 6%...
Stocks are up 5 days in a row (S&P's first +1.5% or more day since May) - at a pace that seems to be capped...
Here's why stocks are suddenly melting up, as we have been warning...
1. Dealer gamma turns deeply positive
— zerohedge (@zerohedge) November 3, 2023
2. $5BN in daily buybacks until mid-Dec
3. CTAs buying up to $200BN in global stocks over next month
4. Hedge Funds least net long since 2011
5. Seasonals pic.twitter.com/Rv3U1HLGHx
Nasdaq had its best week since Nov 2022, but this was the Russell 2000's biggest weekly gain since June 2020 as it ripped hard to try and regain its 50DMA. The rest of the major all surged back above their 200DMA and 50DMAs...
The biggest short-squeeze in stocks in a year sent Small Caps soaring with a basket of the "most shorted" stocks up over 11% in the last 2 days (and the biggest weekly short-squeeze since January)...
Source: Bloomberg
...with shorts massively outperforming Hedge Fund's most important positions...
Source: Bloomberg
"Fear" has left the building...
Source: Bloomberg
Bonds were also dramatically bid with the long-end significantly outperforming...
Source: Bloomberg
Putting that in context, the entire curve has bull flattened hard...
Source: Bloomberg
TLT - the Treasury Bond ETF - saw its best week since the start of January, with the biggest 3-day climb since Oct 2022. This came as TLT call volume hit its highest in history...
Source: Goldman Sachs
This was the best week for a combined stock-bond portfolio since Nov 2022...
Source: Bloomberg
The dollar has fallen for 3 straight days - close the worse 3-day decline this year - back to its lowest since the September FOMC meeting...
Source: Bloomberg
After a couple of exciting weeks, crypto was relatively calm this week (despite a midweek surge up to $36,000 after The Fed), but hovered around $34,500...
Source: Bloomberg
A lack of escalation from Nasrallah's speech this morning sent oil prices significantly lower today (less fear of escalation). WTI is now below the pre-Israel-attack lows...
Gold (futures) held up this week above $2000, but considering the slump in the dollar, this was weak performance by the precious metal...
Finally, as a reminder, it's not just stocks that crashed in 1987. Bond yields collapsed too...
Source: Bloomberg
Imagine how much that would 'ease' financial conditions... and how quickly The Fed would need to step in to jawbone things 'tighter' again.