[Original Author, by Nigel Ng]
In the past fortnight, we’ve seen the typical “bad news, good price” as CPI failed to take us a leg lower and got completely faded on the day of the print. There was plenty of choppiness the days after, but the peak valuation trade set in and an initial article from Timiraos + very dovish comments from Mary Daly brought us 200 points higher in Spooz. It wasn’t a coincidence that she was the last Fed speaker before the blackout period, and positioning long equities and short $ would provide an attractive risk/reward into Fed, but with Spooz almost at 3900, the risk/reward isn’t fantastic anymore.
Valuation relief at any point in time is always stronger than strong earnings, but that doesn’t make earnings irrelevant. Terrible earnings came in this quarter, with big tech companies missing on key components and posting weak guidance, in areas such as ad revenue, cloud, and net sales. However, we saw another episode of “bad news, good price” as the final earnings call from AAPL marked the bottom in equities, with participants liking the revenue beat. I would be wary about following price action here. All eyes are still on the Fed, and Timiraos seems to be losing his influence over market participants.
Data-wise, we’re still in a hot economy with a strong and tight labor market. ECI is still uncomfortably high, and so is CPI/PCE. These are all the key metrics that Powell has mentioned the Fed will be looking at. There is much chatter over whether there will be a larger sized hike in December, as market consensus is now 75 then 50. However, it’s important to remember that the truly important number is the terminal rate. Any mention of it being > 5% at the Fed meeting would be extremely bearish and that would create new lows in equities, with no relief from valuation and no relief from earnings. Stay flexible and re-calibrate during this Fed meeting.
