The BRICS Are Stacking Up

That was an interesting night .... Of course it's still very early as I write this. Actually, most of you would call this the middle of the night. S&P futures and Nasdaq futures are both exhibiting some weakness. That's not so unusual and may not be so meaningful, more than five hours ahead of the opening bell. I did find it interesting that as Day One of the BRICS summit opens in the Russian city of Kazan, the top five performing names overnight on my most active portfolio are my gold and silver exchange-traded funds and a couple of large defense contractors.

Of course, it could be that those two defense contractors, Lockheed Martin LMT and RTX RTX are both set to report ahead of this morning's opening bell and nothing more. There is nothing definitively ominous about visible upside leadership in precious metals and defense/aerospace stocks, but it has been my habit when I see this to feel around for my chinstrap, just to make sure it is buckled and zip my flak jacket all the way up. Never hurts to be ready for something stupid to happen.

That said, remember when I wrote that the BRICS summit might include representation from several nations in addition to those nations implied by the acronym -- Brazil, Russia, India, China, and South Africa? Well, it turns out that the BBC is reporting that more than 20 heads of state are converging at this gathering and that invitations sent do include President Masoud Pezeshkian of Iran. Though the annual BRICS summit is officially termed a summit of emerging economies, the Kremlin, according to the BBC, has called this event one of the "largest-scale foreign policy events ever."

Russian government officials have indicated that as many as 30 additional nations have expressed an interest in either joining the summit or at least tying themselves closer in some way to the group. Does this mean that Russia has more friends or allies around the world than many think? Maybe that's the case, or maybe that many nations are seeking a way to trade around the U.S. dollar, which we know that the BRICS nations are actively pursuing.

My amateurish gut tells me that this is indeed more about seeking to decrease U.S. economic dominance than it is about anything close to a military-style alliance as we know that China and India certainly have at times opposing national and even economic interests. A number of the smaller nations invited to these meetings have issues as well. That said, so many nations uniting together in seeking to find a way to trade around the planet's dominant reserve currency has to be taken more seriously than I think anyone in Washington understands. At a minimum. the ability of the U.S. to export a portion of its own inflation could indeed be crippled.

Interesting Day on the Market

I have seen Monday described as a day of broad market weakness, but was it really? It was for Treasury markets. That's for sure. The yield for the U.S. Ten Year Note backed up 10 basis points on Monday, going out at 4.19%. I see the Ten Year paying more than 4.21% this morning. The yield for the U.S. Two Year Note went out at 4.02%, up seven basis points on Monday. That product is yielding close to 4.06% this morning.

Is the bond market taking control over the long end, or even the belly of the yield curve out to the long end away from the Fed? It's sure starting to look like it. A sign of "quantitative easing" to come? Just how perverse can domestic monetary policy get? To start adding to the Fed's balance sheet and the monetary base just to artificially impact the purity of price discovery at the long end of the curve just to provide cover for those most irresponsible among us (Our legislators and the U.S. Treasury Department) would only add to the perception (reality) of the U.S. dollar as vulnerable to our economic adversaries.

As for equities, the S&P 500 only gave up 0.18% on Monday as the Nasdaq Composite actually gained 0.27%. So, no, there was no broad equity sell-off on Monday. That means nothing on Tuesday, as sentiment has little impact upon short-term algorithmic trade. There was some profound weakness around the mid-major equity indexes. While the Philadelphia Semiconductor Index managed to close in the green on Monday, the Dow Transports, KBW Bank Index, Russell 2000, S&P Smallcap 600 and S&P Midcap 400 all surrendered between 1.18% and 1.78% for the regular session.

Breadth

Ten of the 11 S&P sector exchange-traded funds closed in the red on Monday, led lower by the real estate investment trusts ETF XLRE. That fund was down 2.06% for the day followed distantly by Health Care XLV, which closed down 1.18%. Technology XLK was the only gainer among the eleven, up 0.47% for the day, led by the semis as Nvidia NVDA ran 4.14% for the session.

Check this out, because this is interesting: Losers beat winners by a rough 4 to 1 at the NYSE and by about 9 to 4 at the Nasdaq. Broad sell-off, right? Advancing volume took just a 27% share of composite NYSE-listed trade in aggregate volume that was up a smidgen from Friday. That's pretty bearish, don't you think?

Now, hear this: Advancing volume took a 60.8% share of composite Nasdaq-listed trade on Monday, despite winners being significantly outnumbered by losers. Here's another curve-ball. Aggregate trade across Nasdaq-listings increased on a day-over-day basis by a whopping 19.7% from Friday. Is that negative, because losers beat winners by about 9 to 4, or positive because advancing volume beat declining volume by more than 3 to 2? I don't know. I'm asking you.

Is Inflation Accelerating Again?

Like I have been telling readers since the cows came home: Consumer-level inflation was likely to bottom in September or October and then start to accelerate again. Nothing out of control like the reaction to the expansion of money supply in response to the pandemic shutdowns. That said, we do expect a gradual build up into next year, which really adds insult to injury as far as the American public is concerned after the cumulative 20% to 30% consumer level inflation over the past three years. Any positive inflation at all, even reaching the Fed's 2% target does little for those still suffering from sticker shock at their local grocer.

In September, the headline consumer price index bottomed at growth of 2.4%, while core CPI appears to have already bottomed over the summer at growth of 3.2%. According to the Cleveland Fed's Inflation Nowcasting model, October CPI is running at headline growth of 2.57% and Core growth of 3.34%. Interestingly, in the very first paragraph of the Oct. 11 issue of Jim Grant's Interest Rate Observer, Grant speculates in regard to "a surprise second wind in the measured rate of inflation."

As readers well know, I rely upon the crew at Hedgeye Risk Management for much of my macroeconomic modeling needs. Hedgeye uses two distinct models to forecast their year-over-year growth rate for headline CPI and then creates one outcome form those models. Without giving away their store, because after all, Hedgeye is a business and I am a customer, their models are actually a touch warmer than are the Cleveland Fed's models for October and their models remain warm through Q2 2025.

What Sarge is Currently Reading ...

Just started Judy Shelton's new book "Good as Gold, How to Unleash the Power of Sound Money" last night. I am about 15% of the way through. Looking forward to getting back to it later today. Great read. Judy is one heck of a smart economist, and we all need to understand what she is trying to tell us. She should already be a member of the Fed Board of Governors, but ... partisan politics. At least now, she'll be set up for a likely even more important role as someone able to not only think outside of the box, but out-think the box will be required in the near to short-term future.

Economics (All Times Eastern)

08:55 - Redbook (Weekly): Last 5.6% y/y.

10:00 - Richmond Fed Manufacturing Index (Oct): Expecting -18, Last -21.

4:30 - API Oil Inventories (Weekly): Last -1.58M.

The Fed (All Times Eastern)

10:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: CMCSA (1.07), GE (1.13), GM (2.40), KMB (1.71), LMT (6.44), RTX (1.34), VZ (1.18).

After the Close: BKR (.61), STX (1.45), TXN (1.41)

At the time of publication, Guilfoyle was long LMT, RTX, NVDA equity.