Stocks mounted a tremendous rally following the whoosh lower into negative territory after the Fed release.

I have no idea for the reason.
Thanks for reading my Diary.

Enjoy your evening.

Be safe.

I have taken small trading short rentals in (SPY) and (QQQ) at $433 and $337.68, respectively.

I totally agree with this:

I covered all of my March (SPY) $422 puts at around $2/share on the whoosh lower. I now have no positions in the SPY complex.

I also added to my (TLT) long at $131.45.

The FOMC statement, purposely I would guess, was a non-event and they did what Powell laid out a few weeks ago at his semi-annual get together with members of Congress. 

While the economic data has been more mixed of late and Q1 GDP might only be around 1% - yes, off tough comparison of Q4 but still - the first sentence was a repeat of the first sentence at the January meeting, "Indicators of economic activity and employment have continued to strengthen." That wording should have been updated. 

Here was the wording on inflation, "Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures." No mention of course of the huge influence of aggressive fiscal and monetary policy over the last few years however. They did acknowledge that the war, which "is causing tremendous human and economic hardship" they said, "are likely to create additional upward pressure on inflation and weigh on economic activity."

Not surprisingly, Bullard wanted a 50 bps hike but he was the only one. Also not surprisingly. As for QT, it will start "at a coming meeting" but no details on whether that is the next one or one sometime after. We wonder too at what pace it will take place. 

With respect to their projections, which I beg you to take with a huge grain of salt considering their track record, while they raised their 2022 core PCE inflation forecast to 4.1% from 2.7%, it is magic that they expect it to moderate to 2.3% in 2023 and almost bang on with 2% in 2024 at 2.1%. This as they expect the unemployment rate to be 3.5% this year, next year and at 3.6% in 2024. They also cut their 2022 GDP estimate to 2.8% from 4% when last projected and they expect it to be 2.2% next year. No change there. 

The dots, which we really should ignore too, have a mean guess of maybe even eight hikes this year (which would imply 50bps at one of the meetings) and the fed funds futures are adjusting as a result. The December contract is up to 1.895% as of this writing vs. 1.76% this morning. The January contract is at 2% vs. 1.835% this morning. Next year the mean fed funds is 2.8%. Good luck with that assuming the last cycle ended at 2.25%-2.5%. 

Bottom Line

As stated, this was a non event statement notwithstanding my quibbles with some of the wording and their forecasts. They'll hike again in May and June, likely start QT in July and then play it by ear from there. The real change is the pricing in of another hike because of the dot plot reveal. 

As for the press conference, I expect to hear Powell sound committed to reigning in inflation as he tries to reestablish his lost credibility. That's of course easier said than done as how does one thread this needle when economic activity, markets and monetary policy are all conjoined at the hip?

I have covered the balance of my (SPY) short at $428.80.

I have covered today's trading short rentals in (SPY) $430.56 and (QQQ) $333.70 - for between $2-$3 gains, respectively.

President Biden is providing Ukraine with armed drones. 

Added to my short book.

On the "peace" proposal!

Break in! 

New FT article states the proposal only represents the Russian position. 

Stocks moving lower.

Today's (SPY) and (QQQ) shorts are now profitable.

Possible Ukraine compromise premium seems to be bleeding out of the market. It could be critical how they close after the FOMC press conference. A negative close could have sharp implications for the week to come. Too early to tell, but keep your eye on the action from 2:30 to 4:00 p.m.

Stay safe.

Arthur

Breadth (solid) and biggest movers at noon:Breadth

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Mark B

Doug and another person posted that they had begun to accumulate TLT. Seems like a pretty good bet given the chart of the 30 yr yield. Below is a chart from Felder Report showing that the yield is at the upper end of the channel and at serious resistance going back to the 2008-09 financial crisis. I've been watching a daily chart of the yield and it is also at 3 standard deviations from the 20day SMA. Seems like a good bet that yields will head lower, at least for a bit until that 3 std dev situation clears. But the potential head and shoulders bottom could be the lint on the fuzzy end of that sucker.

Pressing shorts now - at the sound of trumpets. We purchased at the sound of cannons!

I closed out my long (MJ) /short MJ calls position for a loss.

As most know by now:

FT is reporting that Ukraine and Russia have made significant progress on a tentative 15-point peace plan including a ceasefire and Russian withdrawal if Kyiv declares neutrality and accepts limits on its armed forces. The proposed deal, which Ukrainian and Russian negotiators discussed in full for the first time on Monday, would involve Kyiv renouncing its ambitions to join Nato and promising not to host foreign military bases or weaponry in exchange for protection from allies such as the US, UK and Turkey 

My cost basis on today's shorts in (SPY) and (QQQ) are now $432.70 and $336.80, respectively.

* America's aging time bomb and immigration issue.

* Powell admires Volcker 

* Predicting the next recession.

Out of the balance of my (SNOW) at $183, +$16 since Monday.

I didn't expect this!

From Peter:

Core retail sales in February, measured here in nominal terms, fell 1.2% m/o/m, worse than the estimate of up .3% BUT January was revised up by 190 bps and December was revised down by 40 bps, so net-net the core pace of retail sales was as expected.

With omicron moving to the rear view mirror in February, sales at bars/restaurants rebounded by 2.5% after two months of declines. After a sharp drop in December, a big bounce in January, online retail sales fell almost 4% m/o/m. Sales of autos rose as they did for building materials, clothing, department stores and at misc stores like pet. Sales fell for both electronics and furniture.

Bottom line, separating out nominal spending and the influence of inflation, and not exactly apples to apples here, retail sales including food and gasoline, is up 5.7% over the past 6 months. Headline CPI over this same time frame is higher by 3.7%. So REAL retail sales is higher by just 2% in total, using this back of the envelope calculation because CPI includes the cost of shelter and healthcare, over the past 2 quarters.

Import prices in February ex petro rose .7% m/o/m after a 1.3% rise in January. That was one tenth less than expected but still up 7.6% y/o/y so a tenth here, a tenth there is irrelevant. Import price gains were again led by industrial supplies and food/beverages outside of energy. Import prices ex food and energy were higher by .6% m/o/m and 6.5% y/o/y. Prices again are jumping for things we import from Canada, by 2.7% m/o/m and 25% y/o/y.

As for things we export, prices rose .8% m/o/m and 7.9% y/o/y ex food and fuels.

Bottom line, this data highlights again the global nature of inflation but something we already clearly know about. Also, it's pre war data.

Import Prices ex Petro y/o/y

I took a small short rental in (QQQ) at $334.10.

As a rejoinder to my earlier post - I asked Danielle DiMartino Booth and Peter Boockvar their reaction to my comments on a weak first quarter GDP print. 

Here is how Danielle responded: 

Dougie,

It's the control group that printed the worst at -1.2%. That is the figure that feeds GDP and could flip it negative. Watch the inventories data at 10 AM as this could change the calculus either way. The Atlanta Fed GDP Now out later today from starting point of +0.5%.

Then I asked Peter to respond: 

"If you include the prior 2 month revisions, the number was about as expected."

Traders were busy buying banks not robbing them on Tuesday as interest rates inched a bit higher and the geopolitical situation seemed to calm down a little bit, which, in fact, helped the rates to inch higher rather than seeing a flight to safety.

As we told you in the preopening comments, in the wee small hours of the morning, the futures had flipped from negative to mildly positive on some non-specific upbeat buzz on the situation in Ukraine. It was a factor throughout much of the day's trading and, from what I could determine, it had smatterings of different things, including the Prime Minister of Poland headed to Kiev for a visit, which made people think maybe Kiev and the Ukraine might not be on the verge of total anarchy. Also, aiding throughout the day were continuing reports of fugitives safely escaping in civilian cars in the besieged city of Mariupol in southern Ukraine. Also, the continued star tour of Zelensky, who will be speaking to the U.S. Congress sometime Wednesday morning and that continued to add to the idea that things might just be straightening out somewhat. Also, they began the first day of the Fed meeting. Here, again, nothing was thought to be a big factor.

Everybody was pretty secure in a 25 basis point move and, while Powell was assumed to speak a little hawkishly, it was thought that it was not anything of great note. We rallied solidly but not overwhelmingly throughout the morning and, as the morning wore on, a couple of friends asked what we thought was going on and we replied by issuing this late morning summary:

Late Morning Update A relatively calmer day in Ukraine has allowed for rebound rally in the morning, which is waiting to challenge yesterday's highs. To refresh your memory, yesterday the Dow high was 33395; S&P high 4247 and the Nasdaq high was 12918. We got within hailing distance but so far haven't run at them. They are the lines day traders will continue to look for. The hope for Ukraine remains as the hostilities have not taken a sharply higher move and, there are still reports of talks going on with some mild progress. Also, the China wildcard - not having heard back from them after an intense seven-hour U.S. parlay. Again, we are watching the newstickers and watching yesterday's highs to see if they want to try to push through.

Stay attentive and stay safe.
__________

It was interesting to watch how the rest of the day progressed. The bulls kept the pressure on on the upside, but seemed to stall out around yesterday's highs, which we had noted. They did punch through a little bit and, it looked like a solid but unspectacular rally. That is until the final 90 minutes and that's when the bulls kicked into high gear and added significantly to the day's rally, closing basically on the top tick.

Two interesting sidebars from me. Number one - you will recall the so-called Fed Drift, which says that in the final 12 trading hours before the Fed makes its statement, the market tends to drift upward. We got started a little early on this one. Another peculiar one that we will watch carefully is that over a week ago, we had said that one of our chart patterns suggested that we might see a top or at least a very short term high on the 15th. Never did we assume that it would be a one day spike high. We had assumed it would be a couple of days pattern and then topping out on the 15th.

So, we will watch with tongue deeply in cheek to see what happens. If we do rollover this Wednesday afternoon and move lower, it will be one to annotate in our traders handbook. You can't make this stuff up. In the pre-dawn hours Wednesday morning, such a rollover looks even more unlikely. The Chinese Vice Premier made some strong and encouraging remarks about the badly wounded Chinese tech sector.

One of those indices is up 25% today alone and that has put a bid under stocks on all continents. Helping further was some comments from Zelensky, who said that it did appear that it would be highly unlikely that Ukraine would ever be able to join NATO. At the same time from the Kremlin, we heard that they were encouraged by the thought of Ukraine remaining neutral and having its own army. That last part is a big step away from the previous thought that they wanted Ukraine to not only be neutral, but to completely disarm and possibly disband its army. So, we may be inching in the right direction. Anyway, overnight global equity markets are borderline jubilant. The comments we noted from the Chinese Vice Premier have Chinese tech stocks soaring.

That has brought a sense of enthusiasm to much of the other Asian markets. More positive sounds from the Kremlin and Zelensky also have the geo-political war hawks toning down what is going on. As dawn hits Central Park, the Dow is discounting a possible +350 opening.

So, the bulls, for argument sake, may say okay, we've got the ball. We have seen the bottom and we are going to run with it.

It is tough to gauge the geopolitical impact here. As I said, the seasonal form charts have allowed for a possible high or short-term top yesterday. That seems to be neutralized by the overnight action.

The interesting thing would have been away from news and away from all manner of logic and speculation, the form chart would have showed the market possibly rolling over right after the Fed decision and, selling off steadily but not relentlessly and winding up with a spike bottom somewhere around the 23rd or 24th of March. As I say, the rumor mills and futures trading make that look on the face of it absurd.

We will watch carefully to see what happens between 2:00 and 4:00 when the market takes a look at what the Fed did and said and where it wants to go. Surprises are always possible. The economic calendar is relatively light with the economic focus primarily on the Fed and the press conference and, how the market seems to react to it. Geopolitically, things seem upbeat.

We assume Zelensky will be a big hit in his virtual address to the Joint Session of Congress. He will probably call for air assistance and probably the MiG swap. Biden and the others are against it. While there is some concern if Putin were to go nuclear because various commentators on the networks complain that since we never followed up on the Ronald Reagan Star Wars dome effect, we are not as highly protected against nuclear missiles as. believe it or not, the Russians may be. They are assumed to be able to be protect up to 70% of the population or key locations. It is said that the U.S. operation is not that quite effective.

Let's hope to God we never find out whether any of that stuff is true and, the action begins at 2:30 today. Watch the newsticker. Keep your seatbelt fastened and stay safe.

Peter asks whether the Fed is being priced in:

It's possible that today's FOMC statement and follow up press conference ends up being a non event because the bond market has already priced in about 7 rate hikes of 25bps each. The December 2022 fed funds futures yields 1.76% and the January 2023 is at 1.835%. Thus, if Powell wants to regain any shred of credibility he will be hawkish after the 25 bps rate hike today which will take the fed funds to a range of still only .25-.50% less than a week after CPI printed 7.9%.

But hawkish as stated has been priced into the short end already. Even if he mentions again (as he did a few weeks ago at his semi annual coffee talk) that he could hike by 50 bps at a meeting, as he wants to flaunt now that he's serious about containing inflation, it might not change where the December fed funds trades at as the destination might still be the same result. On QT, I doubt whether we'll get details on the pace and timing of that yet as Powell has hinted that it might come instead in either May or June but I'm sure he'll talk about.

With no central bank FX reserve safe anymore when denominated in someone else's currency and gold the only truly safe holding, the monthly US Treasury International Capital data will become ever more important to watch to see if foreigners start lightening up on US Treasuries and start parking some of this money elsewhere. When reported it is somewhat dated so we'll have to be patient to see the post invasion stats.

Last night the January numbers came out and foreigners bought a net $74.4b of US notes and bonds. This follows buying of $81.2b in all of 2021 after six years of large net selling on balance. A lot of that money though might have come out of US stocks as the stock market selloff in January resulted in foreign net selling of US stocks of $50.1b. Japan and China, the two largest holders of US Treasuries added to their holdings. Europe in the aggregate too was a net buyer. Bottom line, the coming few months and quarters will be really important to watch, especially as the Fed is no longer adding to its balance sheet and soon will be shrinking it.

Thanks for the reminder from my friend David Rosenberg who posted this yesterday, it is the updated Fed's flow of funds chart highlighting household net worth as a percent of disposable income. It is the ultimate visual of the asset price inflation the Fed helped to stoke relative to the actual economy, with disposable income the proxy. At the end of Q4 it reached 825% vs 650% in Q4 2006 at the peak of the housing bubble and was at 615% in Q1 2000 as tech stocks reached its epic top. This is the asset price bubble that the Fed created and is now tightening into. We wish them luck on slowing consumer price inflation without putting a pin in asset price inflation and the economy.

Net Worth as a % of Disposable Income

I said yesterday that the waterfall decline in the Hang Seng index usually typifies the end of a bear market fall and we'll see if that's right after a meeting of China's financial policy committee led by Vice Premier Liu He that resulted in some conciliatory comments in a statement about markets and the regulatory quagmire they've put big tech through. The Hang Seng rallied by 9% and the H share index spiked by 12.5%. The Hang Seng tech index was up by 22% and got back the selling of the prior two days. When looking out in coming years, I remain very bullish on many Asian markets and plenty of babies in Hong Kong were thrown out with the bath water too.

Maybe this story from Reuters sharpened their minds on the regulatory nightmare that they've put their most successful tech companies through. According to sources, "Alibaba and Tencent Holdings are preparing to cut tens of thousands of jobs combined this year in one of their biggest layoff rounds as the internet firms try to cope with China's sweeping regulatory crackdown." In that policy statement it did say that this crackdown should be done "as soon as possible" and that regulation "should be standardized, transparent and predictable." Predictable it certainly hasn't been. It also said they are working towards an agreement with US authorities and meeting the US listing rules. We'll see.

Also helping the mood, Foxconn was allowed to reopen its Shenzhen facilities as long as they create a bubble type environment.

The average 30 yr mortgage rate jumped to 4.27% according to the Mortgage Bankers Association, up from 4.09% last week and 4.15% in the week prior. Refi's fell 2.8% w/o/w and are down 49% y/o/y in response. Purchases though hung in there as they were up a touch, by .7%, though are still down 8.4% y/o/y. With sharp home price gains and now the jump in mortgage rates, affordable challenges become ever more a problem.

But, if you want to go rent a single family home instead, you'll have to pay up by 12.6% y/o/y according to CoreLogic's Single Family Rent Index which was out yesterday. Rent growth in Orlando was 20% and in Phoenix prices jumped by 19%.

Japan said its February exports rose 19.1% y/o/y, which was close to the estimate of up 20.6%. Imports jumped by 34%, well more than the forecast of up 26.4% and we can blame the ever more expensive energy imports they need at the same time the yen is weak. This data is pre war. The Nikkei rallied by 1.6% overnight and JGB yields ticked higher.

Morgan Stanley downgrades Fin TV fave - I am not sure why! - SoFi Technologies (SOFI) this morning: 

Morgan Stanley highlights that the student loan repayment holiday will likely extend through YE22, which drives her downgrade of SOFI ($10 PT) to equal weight from over weight.She notes that a key part of her prior positive thesis was an expectation of a sharp rebound in student loan refi volumes once the Biden administration lifted the federal student loan moratorium, initially set to end after January 31. It looks like she'll have been wrong twice now, as commentary from the White House in recent days suggests the administration is considering yet another extension, pushing it beyond the current May 1 expiry. Her new base case assumes the moratorium will be extended to at least 1Q23. Her FY22 student loan refi forecast moves ~20% lower to ~$4.1bn, now flattish with FY21 and ~30% below consensus. While SoFi reported better than expected revenue growth in 4Q21, she points out that one area of weakness was mortgage, where originations were ~20% below forecast. She is moving her 2022 home loan estimates down 20%, to $3.2bn, as 1) industry mortgage volumes are moving sharply lower in 1Q22, expected to decline ~20% q/q and ~40% y/y, and 2) it will likely take SoFi until at least 2Q to get up to full speed

A rising probability of stagflation is being priced into the markets:

Retail sales +0.3% vs. +0.4% E.

But ex auto +0.2% vs. +0.9% E.

I suspect 1Q GDP could be negative - in real terms.

Putting out some shorts here.

From Liz Ann:

From Danielle DiMartino Booth on volmageddon and the rising risk of recession:

A Semi-Charmed Walkon the Wild Side

Speaking of records, it looks like the Federal Reserve's balance sheet crested just north of $8.9 trillion before ending its quantitative easing (QE) program last week. Is Volmaggedon II next? You be the judge. A $905 million exchange-traded note (ETN) that bet on stock volatility surged in heavy volume Tuesday after becoming untethered from the value of its assets after Barclays stopped issuing new shares. It's critical to clarify that notes, as opposed to exchange-traded funds, are liabilities of the bank as opposed to direct ownership of the underlying; it's effectively a bond issued by Barclays, which necessarily implies money good. Nonetheless, ticker VXX being halted five times in the first hour of trading, as it jumped as much as 45% intraday, did put traders on edge.

As a refresher, Volmaggedon I (the potential prequel) saw an inverse VIX note (ticker XIV) blow up spectacularly on February 5, 2018; the closely followed VIX index vaulted 116% on that day. Powell had just taken the reins of the Fed and the "paint drying" of Quantitative Tightening (QT) was getting underway. In a sign of how different a Fed chair he was in the beginning, he didn't blink at the extreme, yet short-lived, episode.

We sense that yesterday's Barclays ETN drama had less in common with the original Volmageddon and was akin to February 2012's issuance suspension of the VXX lookalike TVIX, which proved to be a nonevent. The caveat: Frayed nerves in the aftermath of the seizing up of trading at the London Metals Exchange questioning the solvency of just about anything is enough to keep this on your radars.

As for Powell, he faces a different kind of problem. The persistence of higher inflation saw global fund managers in March flip to a majority of 51% judging inflation as "permanent," above Team Transitory's 42%, a first. Moreover, 62% expect "stagflation," far surpassing "boom" expectations of 35%; the former rose 32 points from February to a September 2008 high while boom collapsed 30 points.

Yesterday's February U.S. producer price index (PPI) illustrated burgeoning price persistence. The PPI for semiconductor manufacturing posted the second straight 4.0% annual inflation rate (yellow line). For the better part of the last 25 years, from 1995 to 2020, semiconductor manufacturing inflation wasn't inflation at all. It was deflation. That shifted significantly in 2021 and has landed semis inflation in record territory. The departure from the past coincided with core CPI, which excludes food and energy, and spiked in tandem with semiconductor pricing. Since 1985, semis inflation has had a decent .54 correlation with that of core CPI. Post-Covid, the relationship has tightened significantly to .82. A cooling in semis inflation will be followed by the core, but we're not there YET, so file it away.

When you think semiconductors, you usually think Silicon Valley, Intel. However, New York has its own footprint in the space. A press release from last July explains: "GlobalFoundries (GF), the global leader in feature-rich semiconductor manufacturing, today announced its expansion plans for its most advanced manufacturing facility in upstate New York over the coming years. These plans include immediate investments to address the global chip shortage at its existing Fab 8 facility as well as construction of a new fab on the same campus that will double the site's capacity." GF added that the new capacity will serve the growing demand for secure, feature-rich chips needed by high-growth markets including automotive, 5G connectivity and the Internet of Things, thus supporting national security requirements for a secure supply chain.

In other words, we are remiss to dismiss out of hand the Empire State Manufacturing Survey.
Inversions abounded in yesterday's March data. Two demand-supply spreads raised industrial recession warning flags. The shipments-inventories spread fell to -28.9 in March (green line), and the new orders-inventories spread plunged to -32.7 (orange line). Both extended their losing streaks to three months. Both echoed past recessionary episodes.

There's nothing semi-charmed about these regional industrial signals. The Street will need more convincing given Empire's standing on the manufacturing survey roster. But the dye has been cast. The risk is rising for downgrades to the near-term outlook for industrial production. Every other pre-ISM (Institute for Supply Management) survey from the Philadelphia, Richmond, Kansas City and Dallas Fed Districts, as well as the Chicago PMI, should be raised on your collective economic indicator watchlists. And the Fed's going to tighten into this?

More on the possibility of a Ukraine/Russia "compromise."

Peter Boockvar on the likelihood of a U.S. recession.

Wolf Street on home and apartment rental inflation, here.

See: 

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I have been taking a short trading rental in (SPY) in the premarket.

I have a scale higher.

Current cost basis is about $430.67.

Positive comments about a possible Ukraine proposal by Russia spurring futures now.

* The market (and money) never sleeps

* The market has no memory from day to day

* Yesterday I went long premarket weakness, today I am shorting premarket strength

"Workin' on our night moves
Trying to lose the awkward teenage blues
Workin' on our night moves
In the summertime
And oh the wonder
Felt the lightning
And we waited on the thunder
Waited on the thunder."

- Bob Seger, "Night Moves"

I described the importance that overnight futures trading holds for me in this column a few weeks ago. It is a guidepost to my strategy in the regular trading session.

Moreover, the overnight/early morning futures holds opportunities as it is (1) inefficient, though liquid, and (2) it seems fear and greed is often exaggerated outside the regular trading session.

It was a bullish evening/early morning for futures. Gold was down again (-$11) and Brent crude was +2.70 to $103/barrel.

S&P futures peaked at +48 and bottomed at -17. At 5:00 am ET they were at +39

Nasdaq futures topped out at +231, dropped as low as -30. At 5:00 am ET they were at +201.

Yesterday I bought the premarket weakness in (SPY) at $414(!) and today I am shorting the premarket strength at $430.17. What a business!

I am short (small) SPY and against that I remain short the March SPY $422 puts, with an expiration on Friday.