I was getting ready to write up a post about how Meta looked like an isolated implosion. That a bearish development in the market might require a Google miss after the bell. That still might be the case, but the picture is clouded by the markets reaction to first quarter GDP.
The Atlanta Fed settled on 2.7 percent growth heading into the GDP announcement. Economists were around 2.0 to 2.2 percent. BEA just reported their first estimate 1.6 percent.
That’s not a huge miss frankly, but what shocked me this morning is how the market responded: in precisely the opposite way I expected. At least until I saw the price index. The PCE both headline and core came in about 20 basis points ahead of Cleveland Fed forecasts. Long story short, the price illusion has been revealed. The economy hasn’t been growing that fast; it’s been inflating.
Since February 2021 and certainly heading into March 2022, the market shifted into inflation worry. Rates hikes were bearish for stocks and bonds. Strong economic growth was bad for stocks because it meant rates go higher for longer, since inflation pressure remains and because the Fed has no pressure to cut if the economy is fine.
High CPI? Bearish. Strong retail sales? Strong employment? Strong GDP? Bear, bear bear. USD rallies on these news items because higher rates leads to a higher dollar too. How add in a weak economy too. In general, recession creates a flight into the safety of cash. Cash is USD.
Here’s December rate expectation. Subtract the number from 100 to get the interest rate. Below 95, the market is starting to back away from two rate cuts by December. At 94.50 (or thereabouts because we’re dealing with forecasts and expectations), the market expects no rate cuts will have happened by the conclusion of the December FOMC meeting.
A big reason why I expected a potential rally today, at least off the overnight lows, was the U.S. dollar. It was down versus most currencies, including even the Turkish lira. All assets needn’t be correlated every single day, but a big down day will usually see some alignment and the current state of affairs has been dollar up, stocks down and vice versa.
Here’s the reversal via the euro. My VIX whisperer, USDMXN is up around 1.5 percent at the moment, bouncing around like a ping pong ball.
Bonds are coming up on a technical test of the October 2023 low. The big volume area is the trio of horizontals above. Volume traded at lower prices gets smaller and smaller, though it isn’t nothing. October’s low was a fairly big one. I’m still open to the idea that bonds might not go lower, if disinflationary and bearish events elsewhere start cracking the economy. Going to new lows would probably mean the S&P 500 Index is already down a minimum of 10 percent, but possibly more like 20 percent.
Meta will open with a massive reversal island today. Everyone who bought since the gap up on February 2 is underwater. If the stock can’t rally, they are trapped. Meta looks like it’ll open below the long-term uptrend line shown in blue. I’m more focused on the gap that is right around the 2021 top. Below that, and it starts looking like a failed breakout. The implication would be the entire market could be a confirmed double-top soon.
This is going to be a huge day for the market. The past 18 months have taught me to assume nothing until there is clear confirmation of a bear move. Bulls have stepped in to buy everything, always. While I think it’s insane to buy here, most of the buying has been irrational after the initial bounce off October lows. The market has been running on sentiment fumes for months. Reality, in terms of where levels of interest rates and growth should send stocks, has been deteriorating, Today will be a major test of whether those bullish fumes are still strong enough to deny reality.