By Peter Tchir of Academy Securities
This will be a quick summary of the topics grabbing our attention at the moment.
Russia
Russia and the Wagner group remains a question mark. Today at 1:30 pm Academy will host a Russia focused webinar (register here). Rachel Washburn is back in her role as moderator Air Force General (ret.) Deptula (who is on Putin’s list of banned Americans) and Marine Corps General (ret.) Robeson should provide some insights. China will likely be a topic of conversation because at this point, nothing happens geopolitically that doesn’t have some level of China involvement and their relationship with the U.S. Sunday’s Ride of the Valkyries is a good starting point on the subject and it links to recent SITREPs on the subject.
AI
You can watch last week’s AI Webinar Replay. Admiral (ret.) Barrett was great as always and recommended reading the National Institute of Standards and Technology (NIST) Artificial Intelligence Risk Management Framework paper. General (ret.) Groen had some great insights until Zoom “inexplicably” kicked him out and wouldn’t let him re-enter (we are “sure” it wasn’t AI related, but…).
Month-End Rebalancing
With stocks selling off in the last week, the need to sell equities to buy bonds for monthly and quarterly rebalancing will be reduced. Still large but reduced. It is difficult to determine how much rebalancing has already been done, but that may have contributed to recent equity weakness.
The T-Bill Deluge
Academy’s money market team has pointed out that the Treasury department has done an excellent job of issuing T-bills with limited market impact. They are pricing well in line with other money market instruments.
Will the ongoing need to issue Treasuries act as a headwind for risk? On May 31st the Treasury Reverse Repo facility stood at $2.25 trillion and it declined to $1.96 trillion yesterday. Presumably money is coming out of this facility and going into T-bills (that is the lowest balance in RRP in over a year!).
With the potential for T-bill issuance to shrink deposit reserves and ongoing balance sheet reduction at the Fed we have another potential headwind for risk assets (QT was interrupted by the need to provide funds to some banks through the discount window and other special facilities).
Jobs
Next week we get more jobs data. It is all piled into two days – the 6th and 7th due to the midweek holiday.
We have seen an uptick in unemployment claims and I’m sticking to my theory that It Is Highly Unlikely Economists Got it So Wrong. The probability that so many analysts, working independently, all missing the Establishment number (remember, the Household number was negative) seems unlikely. Add to that the incredibly low response rate the BLS is getting on its job surveys (BLS response rates) and it raises further questions about the data. How are they treating the lower response rate? Is there a bias between companies not responding and the jobs they are creating/shedding?
Jobs have been the single biggest argument against recession and I’m looking for more cracks to be exposed.
Rangebound Fed
I think it will be incredibly difficult for the Fed to hike more than 50 bps this year. We likely get 25 at the next meeting, and I doubt we get the other 25.
It seems incredibly difficult for the Fed to cut this year given the effort they have made to bang “higher for longer” into our heads, but my view is that the economic data will push them to a far less hawkish stance, if not dovish.
So I like the front end of the curve and expect less inversion between 2s and 10s.
Credit versus Equity
I expect credit to outperform equities. High yield might have some susceptibilities, but we are facing valuation/crowded trade issues more than deep recession issues and credit is well poised to handle that. We mentioned vol and other metrics that point to credit being “cheap” to equities in Mid-Year Outlook. The other supporting feature will be a slowdown in IG new issues.
Earnings
For the second quarter in a row, I’m very interested in earnings. While last quarter it seemed enough to say “we survived” the hikes, this quarter might have a higher standard for stocks to respond positively. I will be examining reports for discussions on “pricing power” and whether companies still seem to have pricing power or not. As supply chains righted themselves and commodity prices dropped, pricing power played a key role in driving corporate profits. It is unclear if that positive driver remains intact.
The one thing I’m certain of (and normally it is that about 70% of companies will beat the earnings estimates they have guided analysts to) is that 99% of companies will mention AI (I’d say 100% but there is probably at least one CEO who won’t for one reason or another). I find it difficult to believe this isn’t fully priced into stocks and AI stocks at this point, so don’t expect a repeat of last quarter’s “mention AI” boost.
The Business of Building New Homes versus Housing
We’ve mentioned this before (in our mid-year outlook’s Location section) but want to mention it again. Homebuilders do well when people are moving to new areas. Especially when existing home owners are reluctant to sell when for many, one of their biggest “assets” is their low interest mortgage. I only mention this as I think that new homes and homebuilders are not as indicative of the overall housing market as many would think (that is probably always the case, but so many trends are in favor of the builders, that I wouldn’t extrapolate as much from their strength as I normally would).
Banks, Commercial Real Estate and More
I’ve run out of time for today, but those are all topics where we will get more information in the coming months that will help shape the direction of the market and we will update you on our thoughts.
