A Rally, Nickel and Bonds

By Jeff Kelly on March 18, 2022

The old saying goes “markets climb a wall of worry”. This has certainly been the case this week. We haven’t seen a break in the war news, we did see an interest rate increase, and inflation news is still concerning. However the market still rallied higher throughout the week. Last week we wrote “Seasonal conditions pick up from mid-March to mid-April. If there is no escalation in the war, we could see a meaningful rally, not a final bottom. That lies out further in time and price. The other thing to remember, many stocks will bottom well ahead of the final low in the indexes.” The rally took the indexes up to the levels we saw at the beginning of the Russia/Ukraine war.

The going gets tougher from here. A move above this level, around 4,400 on the S&P 500 can see an extension higher. A failure to break out would keep us in the trading range we’ve seen for a few weeks, from a low of 4,160 to 4,400. We have continued to hold well above the low from February 24 of 4,114.65. The NASDAQ made a new low last Monday, but has also moved back into the range of the past several weeks. A move above 13,880 will likely see an extension higher.

The most interesting moves this week were in the bond markets. The Federal Reserve raised rates .25%. This move caused yields to spike higher for a few moments and then moved lower. The 30-year treasury bond spiked to 2.543%, on Wednesday, immediately after the Fed announcement. Today it sits lower at 2.413%.

There were 3 companies this week which couldn’t get bond offerings completed. One was Tesla. These types of problems don’t usually occur unless there is stress in the system. The markets are ignoring these issues. It’s unlikely they will ignore them forever.

Tesla delays over $1 bln bond sale backed by auto leases 

We have seen some wild moves in commodity markets as well. Perhaps the wildest has been the futures market in nickel. I put a chart below. Currently at 36,914.50 it has a high well above 50,000. These types of moves are historically very unusual. They also don’t typically occur at the start of trends.

Holding key levels on pullbacks will be important. It’s also important to be open minded about how far the rally can extend. We could be just getting started.

CHARTS FROM THE WEEK PAST

Philly Fed Survey which was, by and large, solid.

The headline number accelerated +11.4 points in March from February. In terms of the supply chain and inflation, that is where the bad cop part of this report emerges – Delivery Times jumped +16.7 points, Unfilled Orders rose +5.2 points, and Prices Paid surged to +81 (all-time high).

The chart below shows crude oil inventory (blue line), the black line is the Futures Price, and the gray is 5-year range.

The VIX not only closed below 30 it’s been there for 3 days in a row.

Maybe we can do a whole week!

Inflation above 5% has caused a recession in past periods.

We experienced the 4^th worst start to the year through 48 trading days.

Lots of reasons to panic but it hasn’t happened yet.

European stocks trade at the biggest discount to the U.S. since 2005.

Supply bottlenecks starting to get worse again.

Credit Default risk on large financials is rising.

Stocks with buybacks are outperforming the S&P 500.

Most commodities are in backwardation.

This means the outlying months futures contracts are priced lower than the current contracts. The market believes commodity prices will fall.

Producer Prices final demand continues higher.

From March 8^th through 16^th many commodity prices have begun falling.

If there is follow through we may start to see inflation numbers decline.

Building Permits at 2006 levels.

More new homes coming as price peak and there’s 20 offers for every home. I’m sure it’s fine.

• High Yield OAS expanded +14 bps d/d to 4.08% as of 03/14, up +51 bps (+14%) from four weeks ago
• The Ted Spread compressed -2 bps d/d to 45 bps as of 03/14, up +36 bps (+391%) from four weeks ago

Empire Manufacturing missed even the lowest estimate (by 2X) with an acute tanking in New Orders driving a -14.9 M/M decline across the Headline, taking the Index to a reading of -11.8 and marking the lowest point since the heart of the pandemic in May 2020. 

Supplier Delivery Times, meanwhile, jumped +11 pts while Prices Paid were largely flat, holding just south of all-time highs.

German business confidence falls by the most ever in the history of the survey.

A 7.1 standard deviation move. Not something you see at a market top.

Public builder margins have never been higher.

Input costs higher + margins higher can only mean market prices higher.

Cash level in mutual funds at levels where market lows have occurred.

No one expects a stronger economy…hmmmm…..

I know this will set those of you who are politicos on fire but in both the Trump and Biden budget 52% of discretionary spending goes to defense.

Housing survey says it’s not a good time to buy a house but I’m going to do it anyway.

Financial conditions starting to tighten just as the economy slows.

Covid cases in China up, a lot.

Probably the Russians.

U.S. Retail Sales: Retail Sales rose +0.3% M/M, accelerating to +17.6% Y/Y in A few quick notables:

January saw a significant positive revision (Headline revised from +3.8% M/M to +4.9% M/M, Control Group Sales revised from +4.8% to +6.7%) so the ‘miss’ relative to consensus is mostly illusory. Some measure of sequential improvement was not overly surprising as activity was comping against the dampening associated with peak omicron domestically. Recall that retail sales are reported nominally (volume + price) so price dynamics certainly matter.  If you adjust the reported M/M gain of 0.3% at the Headline level using either the +0.8% M/M Headline CPI increase (or the +0.5% M/M on Core CPI), real retail sales (volume) was effectively negative for the month.   That will worsen further next month(s).

The rate-of-change comparison wall over the next 3 months is not scalable and will show up conspicuously in the reported growth data.  And playing out behind the idiosyncratic monthly dynamics will be the continued ‘secular’ moderation in pandemic-related Goods spending as consumption continues to renormalize in the direction of Services.

Oil’s impact on inflation is high.

At 95.00 a barrel the impact begins to diminish over time.

A look at past rate hikes.

Where they started and where they ended. We think this one will be shorter and shallower.

Financials peaked before rates peaked in 2018.

They may be peaking now.

And Financials peaked before rates in 2007 as well.

Nice rally the last few days.

However, the number of stocks with a large move is below what we usually see if the rally is sustainable.

A History of Invasions, Wars & Markets

A useful curation of historical sources that outlines the economic and financial ramifications of previous conflicts.

WEEKEND HOMEWORK

A very good book about how far people can be pushed until they react.

Before Bill Gross was known among investors as the Bond King, he was a gambler. In 1966, a fresh college grad, he went to Vegas armed with his net worth ($200) and a knack for counting cards. Ten thousand dollars and countless casino bans later, he was hooked, so he enrolled in business school.

The Bond King is the story of how that whiz kid made American finance his casino. Over the course of decades, Bill Gross turned the sleepy bond market into a destabilized game of high risk, high reward; founded Pimco, one of today’s most powerful, secretive, and cutthroat investment firms; helped to reshape our financial system in the aftermath of the Great Recession – to his own advantage; and gained legions of admirers, and enemies, along the way. Like every American antihero, his ambition would also be his undoing.

Have a terrific weekend.