[Original Author, by Nigel Ng]
In my previous note, I categorised the rally in equities as a bear market rally, given the impulsive move up. Many shorts were squeezed and a big portion of the rally can be attributed to positioning. The final leg up was due to a re-emergence of meme stocks, with names like CVNA, RBLX, and BBY going up in percentages between 30s and 40s, all in a single day! This can be further validated by looking at cross asset movement. Bonds have stabilised and rates have formed a local bottom. The broad dollar has mostly been range-trading the past week as market participants anticipate CPI (and anticipated NFP).
There are a couple of explanations for the bonkers NFP print. Some say it’s an anomaly, due to seasonal adjustments to make up for the jobs lost during COVID. To me, it’s just coincident with the large decline in JOLTs, as people start going back to work. More importantly, wage inflation went up, at 0.5% MoM. If the labour market remains strong, the idea of the Fed tightening into recession is going to fizzle. This, combined with the effect of sticky shelter/rent inflation, may more than offset the effect of falling commodities. Follow the data.
A quarter ago, I thought that the Fed would begin cuts in March 2023. Looking at the recent data, I think that has to be delayed by at least 1-2 more quarters. Fed credibility is at an all time low and they need to remain hawkish to redeem whatever’s left of their reputation. Also, the Financial Conditions Index (FCI INDX on BBG) has loosened significantly and we’re halfway back to the March 2020 highs. With CPI near double digits, I think it’s too early to be talking about easing. Remain bearish on equities/bonds and bullish broad USD.
