Morning Seeds

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Morning Seeds • 01/27/2023 - 9:34 AM EST

Equities March On

Equity markets continued their march upwards after two days of consolidation. On Thursday, the SPX finished the day up 1.1%. It was the 5th day in a row the SPX made its low before noon and the high in the afternoon as the signals of money being put to work continue to show on up days and down days. The SPX closed at 4060 and is quickly nearing the highs from later November and early December of last year. Since the highs in March 2022 there has been a pattern of lower highs and lower lows. A break and daily close above 4080 would be a pattern shift.  

Declining Rates Vol

Yesterday, rates vol also continued to decline, and the MOVE index was down for the 4th day in a row, closing at its lowest level since June of last year. Declining rates vol continues to be driven by lowered recession expectations and a downshifting Fed. The Fed is expected to hike 25 bps at the next FOMC meeting. Economic data yesterday showed an economy slowing but not breaking. We believe it is particularly interesting that the weekly jobless claims did not show signs of an approaching recession. In the coming period, we believe that credit will inform where equities trade.  

Dovish Pricing but Where is the Pain?

With Australia, Japan, and countries across Europe facing stronger inflation, yields have moved higher across the globe. We believe upcoming central bank action could send hawkish ripples throughout the market. While a 25 bp hike from the US Fed has been priced into the market for weeks, cautionary guidance could drive market moves. Moreover, we expect a hawkish ECB and BOE, which will likely hike 50 bps. Meanwhile, ECI, a measure of total compensation, is strong alongside strong prints in both the JOLTS and unemployment claims. China's reopening and activity surge, along with higher energy costs, will continue to be potential inflation drivers.  Powell has said that there will be some pain in the economy as policy becomes restrictive, but that pain has not (yet) been apparent - layoffs been easily absorbed by a resilient labor market in which headlines continue to focus on higher-profile cuts but gains elsewhere and strong wages have been a nearly complete offset.   

China Holiday Enthusiasm

Today is the last day that Chinese domestic markets are closed, as the Lunar New Year comes to an end for China and Taiwan. Market participants continue to measure China’s re-opening and look toward anecdotal travel and spending data, which have been strong. At this point, we view the absence of any negative or change in policy rhetoric as a sentiment-driving positive, and no apparent worsening in the COVID situation given the degree of saturation already. Those markets that are open continue to march higher, with HK Tech now up 16% YTD, evidence of a complete reversal of suppression. Accepting that enthusiasm towards the property market is low as a base case, we expect to see excess Chinese consumer savings/deposits flow into wealth management products and equity markets over the next couple of months and prices have moved in anticipation. Meanwhile, global managers have been underweight China as a result of the China/U.S. divorce, with de-emphasis on Chinese investments a feature of Biden-era policy, whereas a de-emphasis on trade was a feature of Trump-era policy.  This has led to what we view as an ongoing chase.   

Debt Ceiling: In Focus but Pushed Out

The debt ceiling timing picture is firming up as factors are aligning for a September showdown as opposed to something earlier. The pushback is the result of a nascent but nonetheless broad agreement to suspend the debt ceiling through the fiscal year-end. Yesterday Mitch McConnell stated that the “solution has to be from the House,” whereas Hakeem Jefferies, the minority leader in the House, has said that they will not be held ransom.  Meanwhile, Kevin McCarthy has made it clear that Medicare and Social Security are not on the chopping block. We believe that the Democrats want Republicans to make proposals and negotiate against themselves with the view that this will result in political own-goals. By contrast, Republicans want to point to profligacy in a budget/appropriations context as this argument is more palatable and many are not afraid of potential government shutdown as opposed to debt non-payment. Meanwhile, Thomas Massie, a member of the House Freedom Caucus who now sits on the Rules Committee, has already asked for a 1% nominal cut across the board to budget, so there is a starting point for that negotiation.