Market Sets Up For Pullback Right Before Debt Ceiling Limit

The market is definitely setting up for a pullback, but how much and when is the key question.  The market is at a key tipping point. Right now, I am going over the data this morning and working on next week’s Advisor Market Intelligence Report.

Many of the market indicators look like 2008.  Back then, I was running the inside sales desk for a broker-dealer. It was very scary, but this is worse for several reasons.

Last night’s announcement by Biden of a national vaccine mandate went over like a fart in church.

This comes after the horrible pullout of Afghanistan. His poll numbers are sinking fast.

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Why does this matter?

3 Words: DEBT CEILING LIMIT

Next week Congress will most likely start talking about raising the national debt ceiling limit. Most Republicans have publicly stated they won’t increase it.

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Biden and Democrats may be too weak to pass the debt ceiling and spending bills.

What this means is that neither the Federal Reserve nor the Treasury will most likely have the resources to keep pumping the economy.

So we could have a “shutdown” that could accelerate a market pullback that would likely not have many “brake” options by the Fed.

I will be covering this more in Monday’s report. Please consider trying it for $19.95 per month or save more money by paying annually $99.95. (click here for annual).

ABS REPORT

Market Notes 9-10-21

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The chart above shows a very bullish S&P 500 1 day chart.  A dip below 4400 could signal a short-term bearish trend.

This is what moved it so far today:

Fed’s Mester favors starting the taper this year and winding it down by mid-2022, in comments to reporters after her speech. She believes the goals on inflation and employment have been met. Expects inflation to remain high this year before moving back down in 2022. But she added that risks to her forecast are to the upside, in part due to the disruptions from the pandemic, which could prove more persistent than first through. Firms are starting to pass on price increases to customers, and wages are on the rise. And she frets the rise in prices could cause longer-run inflation expectations to rise above the FOMC’s 2% goal. The “transitory” characterization is becoming less useful, she admitted. The labor market has evidenced a “remarkable recovery,” although labor force participation may not be restored to its pre-pandemic. The soft August jobs report did not alter her outlooks or views on tapering. Mester is one of the more hawkish on the Committee and is a voter in 2022.

Wholesale trade beat estimates with a big 2.0% July sales rise after an upwardly-revised 2.3% (was 2.0%) June gain. Wholesale inventories tracked the advance figures with a 0.6% July rise after a 1.2% June gain, though a small boost was hidden by rounding. The wholesale I/S ratio fell to an 8-year low of 1.20 in July from a 6-year low of 1.22 in June that was also seen in March and April. All the wholesale data have received a big 2021 lift from rising prices, and the boom in imports that feed the wholesale sector. We still expect a Q2 GDP growth boost to 6.9% from 6.6% with a $3 (was $2) bln wholesale inventory hike, following previously assumed hikes of $5 bln for retail inventories, $4 bln for nonresidential construction, $3 bln for net exports, and $2 bln for consumption. We expect Q3 GDP growth of 5.6%, with a huge $217 bln inventory addition after an estimated -$73.1 (was -$81.1) bln subtraction in Q2 that left a -$161.4 (was -$169.4) liquidation rate. We assume a 0.5% July business inventory rise after a 0.9% (was 0.8%) June gain.

July wholesale sales rose 2.0%, with inventories up 0.6% in the final read, unchanged from the Advance. The sales jump is twice expectations with strength broadbased. June posted respective prints of 2.3% (was 2.0%) and 1.2%. The I/S ratio dropped to 1.20 in July thanks to the sales outperformance, from 1.22 in June and 1.23 in May. The July ratio is the lowest since the 1.20 from July 2014, which was the weakest since December 2013. The ratio is struggling to climb back toward the pre-pandemic reading of 1.32 in January and February of 2020.

Wall Street opened higher, with the major indices starting the session up 0.5% to 0.6%, since fading slightly. The hotter PPI data was largely overlooked, while a phone conversation between Biden and Xi helped market sentiment, though reports indicate little was accomplished by the call. Rich valuations remain a concern, as the major indices hover between 1% and 2% off their all-time highs, while the usual fears over Covid, economic slowing and the Fed’s plans have kept investors wary.

Treasury Action: yields have drifted higher as the market gives back some of the midweek gains after the stellar auction results and the dovish guidance from the ECB. The firmer than expected PPI report has added to the unwind modestly, along with the pick up in risk appetite that is lifting equities. The bond market is still uncertain over the extent of “transitoryness” of inflation pressures. The 10-year note is the underperformer amid a bear steepener. The yield is 2.7 bps cheaper at 1.324% from 1.299% yesterday, and 1.374% on Tuesday. The curve is 2 bps wider at 110.3 bps, having narrowed 4 bps to 108.3 bps on Thursday.

PPI beat estimates again, with August gains of 0.7% for the headline and 0.6% for the core, following 1.0% headline and core gains in both June and July, leaving eight months of outsized gains. The August gains rounded down from respective increases of 0.707% and 0.634%. The upside August surprise was led by the 2.9% food price surge, a big 0.7% service component rise, and a solid 0.6% rise for goods prices excluding food and energy. On a moving average basis, PPI headline and core gains are trending sharply higher. We have 6-month average price gains of 0.830% for the headline and 0.756% for the core that beat respective 12-month average gains of 0.665% and 0.545%. In September, we assume PPI gains of 0.3% for the headline and 0.5% for the core, which would allow the y/y headline metric to sustain the 8.3% all-time high from August. We expect the core price gain to rise to a 7.0% new all-time high from the 6.7% current all-time high. The y/y metrics should end 2021 around 8.0% for the headline and 7.4% for the core.

PPI rose 0.7% in August with the core rate 0.6% higher, firmer than expected, following gains of 1.0% for both in July. Record monthly gains were registered this year with the 1.2% jump in January pacing the headline, while the 1.0% pops in June and July marked the all-time high for the core. On a 12-month basis the headline accelerated to an 8.3% y/y versus 7.8%, posting yet another record advance as has been the case each month since April. The core rose to 6.7% y/y from 6.2% y/y, also registering a record pace as has been seen since March. Goods prices were up 1.0% on the month versus the prior 0.6% gain, with food prices rebounding 2.9% after July’s -2.1% decline. Energy prices posted a 0.4% gain versus July’s 2.6% jump. Services prices were 0.7% higher from the prior 1.1% increase, as transportation/warehousing costs remained firm, climbing 2.8% versus 2.7% previously. Trade prices were up 1.5% from 1.7%. Post-pandemic demand and bottleneck/supply chain disruptions are helping lift prices.

Energy Action: WTI crude is up from earlier lows at currently USD 69.30, amid hopes that a phone call between U.S. and China leaders will herald, easing tensions. Yesterday’s EIA inventory data showed a 1.5 mln bbl fall in crude stocks, less than feared. Still, concerns of ongoing supply tightness in the U.S. amid the fallout from Hurricane Ida is keeping prices underpinned, and Brent Crude is at USD 72.62 at the moment.

 

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