Has the Fed’s hiking cycle peaked?

The market is pricing in "peak Fed”, with 79.7% certainty of at least 25 bps of cuts as early as May of 2024 — and March a coin toss as to whether that is the first cut or not.

If the Fed is done hiking, we may indeed see yields peak, including on longer tenors, such as the 10-year note. Next week should certainly give us some clues with CPI, PPI, and the Fed’s meeting including the SEP report with their latest views on monetary policy.

As the Fed approaches their first cut, it’s important to consider that often times that leads to downward pressure in US equities.

Context is key, however, as if that first cut happens during an economic expansion it is not as hazardous for risk assets than if it happens during a recessionary environment.

Reverse repo markets have also seen less usage, with the peak of $2.5T a distant memory as we close in on $700B.

Markets rejoice, entering euphoric territory

Volatility, what volatility? 10-day realized volatility in the S&P 500 has rolled over to very low levels, and the VIX has followed along. Hedges are cheap here 3-months forward in ATM SPX puts, but that doesn’t mean they can’t get cheaper.

November was also the greatest easing in financial conditions that Goldman Sachs has ever tracked, a historic month to be sure. Will that prompt the Fed to look at policy projections more hawkishly for December’s SEP? We believe it’s something to consider as the market undid a lot of the work the Fed was happy to see. At the same time, however, inflation has dropped giving the Fed more room to breathe.

November was also an exceptional month for bonds, one of the best ever. Those dropping rates gave equities room to the upside after months of rising rates adding to jitters in risk assets.

Retail sentiment also saw the greatest drop in bearish respondents since April of 2009. 14 and a half years of data, and we have to go back all the way there to see anything that compares to this shift in sentiment. Though this time it’s not happening within the context of a major market drop reversing, but instead a rather incredible and interrupted pop that’s only recently settling as it builds volume at these higher levels.

This led to the overall AAII bulls vs bears survey registering the highest level since April of 2021. It feels good to be long and longs are adding, which does beg the question — at what point to we become lopsided?

Retail flows have also surged, with $7B of inflows over the previous week into equities, according to JP Morgan.

Share buybacks have also helped to push prices higher, though those flows have now peaked and next week we start to see the blackout period decrease these flows as we get closer to Q4 earnings season.

CTAs have been increasingly adding to longs at a rather rapid pace, also helping to push up equities over the last several weeks, as these momentum trading funds had started rather short going into November.

All of this buying pressure has led to an overbought S&P 500. That doesn’t mean the large cap index has to go lower, but it does mean it could be getting closer to short-term buyer exhaustion, particularly given the stretched sentiment, flows and positioning.

Underneath the surface of this market we have seen some distribution of Mag 7 positions by hedge funds, lightening up exposure as they degross their books, which have rather significant total leverage (280-285%).

Labor market data remains mixed

JOLTS came in much weaker than expected, continuing a downtrend that started in late 2021. While the labor market is still tight, it is less tight than it was, with about 1.38 jobs available for every unemployed person seeking work. The Fed would like to see this number get closer to equilibrium (or 1).

Jobless claims showed a significant week-over-week build of 93,761 in the non-seasonally adjusted number, rising to 293,511. Not much to make of this yet, though, we will see if it becomes a trend and moves above 300K for several weeks sequentially.

Today’s nonfarm payroll data showed an increase of 199,000 jobs in November. Better than expected, but still continuing a trend of flattening job growth after a more robust period. This data included UAW workers coming back into the workforce from the strikes that had idled them.

Is the economy set to slow?

ISM Services PMI data showed slowing data at the top line, pulled down by decelerating business activity, and employment as well as drops in supplier deliveries, inventories, and new export orders. Prices paid, however, continued to rise. Prompting concerns about the potential for passing rising prices through to consumers.

The Atlanta Fed GDPNow model revised down Q4 GDP growth to 1.2% from 1.3%, as the government’s spending into non-residential fixed investment slows with some of the CHIPS and Inflation Reduction Act programs closer to completion. With government spending slowing, the economy may slow quite a bit in the months (and quarters) ahead.

We’ve also seen the Manheim Used Vehicle Value index fall, which is great news on the inflation front, though it also may suggest that, again, there are signs of the economy slowing here as demand for cars is also dropping due to a combination of high rates and high prices.

Semiconductors also continue to experience a glut, which gives us the sense that a key area of demand has yet to return to the market. Will the holiday spending season change that? We’re watching closely.

Japanese investors are buying a lot of global real estate in 2023

Investors in Japan have had a rather voracious appetite for global real estate this year, exceeding other year over the last 15.

A large amount of that investment has gone into office space, followed by logistics and multi-family residential.

Spotlight on the US

The United States is the largest producer of oil in the world, accounting for a whopping 21% of all global oil production.

Every state has its favorite brands, and some of these may surprise you! Patagonia is very popular, apparently. I figured they were big, but this is quite impressive.

US viewers of Disney’s pilot episodes have fallen rather significantly over the years, showing less interest overall in the network.

The Oracle of Omaha has his largest equity portfolio allocation into Apple stock, amounting to 48% of all the stock exposure owned by Berkshire Hathaway.

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