Markets under heavy pressure this morning

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Published Date 6/13/2022

Equity markets began this morning where they left off on Friday DJIA -880, starting this morning down 500 more. The 10 yr. note yield at 8 am ET 3.27%, MBS prices in early trading down 55 bps from Friday.

In trading last night, the 2 yr. note briefly exceeded the 10 yr. note, but by the time US markets started it quickly declined to below the 10. The 2 yr. note yield now at its highest level since 2007. The 10 yr. the highest since 2011. Stocks now testing bear market territory, at 9 am DJIA -634 after falling 880 on Friday. Last Friday’s May CPI much stronger than forecasts has shaken US and global markets, prior to the release there was an increasing thought that inflation may have slowed. On Friday that thought quickly evaporated, at least until markets see May PPI tomorrow. A rout in European government bonds also gathered pace, with the yield on German’s two-year government debt rising above 1% for the first time in more than a decade.

The economic outlook taking a turn on the view that the Fed can’t engineer a soft landing for the economy, looks presently like a hard landing is in the future. Equities are still not fully reflecting the vast risks facing corporate earnings and weaker consumer demand, according to strategists at Morgan Stanley and Goldman Sachs Group Inc. Traders are now pricing in 175 basis points of Fed tightening by September, implying two half-point and one 75 basis points hike. If that comes to pass it would be the first time since 1994 the Fed resorted to such a draconian measure. Meanwhile, European Central Bank Governing Council member Peter Kazimir added to the hawkish chorus, saying he could “clearly see the need” for a 50-basis-point rate increase in September.

Bitcoin finally facing reality about cryptocurrencies; it fell to the lowest in about 18 months in Asia trading Monday as the impact of Friday’s shock US inflation data continued to reverberate through global risk assets. Bitcoin tumbled as much as 12% to $23,981 -- its lowest since December 2020. Other cryptocurrencies also declined as a broader sell-off continued. The total crypto market cap, which topped $3 trillion in November, was $1.02 trillion as of 5 a.m. New York time on Monday, according to CoinGecko.

At 9:30 am the DJIA opened -665, NASDAQ -350, S&P -95. 10 yr. note jumped to 3.29% 13 bps higher than Friday and 24 bps from last Thursday’s close. FNMA 4.5 30 yr. coupon at 9:30 am -97 bps and -114 bps from 9:30 am Friday. The 5.0 30 yr. coupon at 9:30 am -73 bps from Friday’s close.

Friday’s May CPI shook traders, stronger than expected, and it also had to rattle the Fed. Powell at a serious pivot point, let inflation continue to increase by not raising rates fast enough or take the bull by the horns and increase the rate increases more than markets have been thinking. It isn’t the Fed leading, it’s the markets, and the Fed must digest a very hot habanero now. However, tomorrow PPI, if its softer than forecast (see calendar) a lot of today’s angst will moderate, on the other hand if PPI is stronger, look out.

The 10 yr. note at oversold level basis the 9 day RSI, the next day or two volatility will likely increase after the PPI tomorrow morning. Markets now looking for the Fed to increase the FF rate by 175 bps by the Sept FOMC meeting, two 50 bp increases, then a 75 bp move in Sept. We don’t take that too seriously now.

This Week’s Calendar:

• Tuesday,

6 am NFIB small business optimism index (93.0 from 93.2)

8:30 am May PPI (+0.5% m/m from 0.5%; yr./yr. 11.0% unch from April. Core PPI +0.6% from +0.4%)

10 am FOMC meeting begins

• Wednesday,

7 am weekly MBA mortgage applications

8:30 am May retail sales (+0.1%, ex autos +0.7%)

June NY Empire State manufacturing index (5.5 from -11.6)

May import and export prices (imports +1.2% from 0.0%; exports +1.3% from +0.6%)

10 am June NAHB housing market index (68 from 69)

2 pm FOMC policy statement

2:30 pm Jerome Powell’s press conference

• Thursday,

8:30 am weekly jobless claims (220K from 229K)

May housing starts and permits (starts 1.695 mil from 1.724; permits 1.780 mil from 1.819)

June Philadelphia Fed manufacturing index (5.5 from 2.6)

• Friday,

10 am May industrial production and factory use (production +0.4% from +1.1%; factory use (79.2% from 79.0%)

Source: TBWS

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