Mindless Fed, Russian Gas, China Covid, Moving to Cash, Jobs Day, Chip Stocks

August is in the books. The S&P 500 gave up 4.24% for the month, the Nasdaq Composite 4.64%. Of course, the S&P 500 has taken a 5.81% hit just since last Thursday's close. The Nasdaq Composite, not to be outdone, has been slapped around for 6.51% since the closing bell rang aloud one week back. Of course that was the last closing bell ahead of Fed Chair Jerome Powell's now infamous speech, where the Chair spoke tersely from some basement dungeon as to set the mood, despite the availability of some of the most aesthetically pleasing backdrops this nation has to offer.

The Spartan visual effect was by design. It was part of the message, which was short and direct. The Fed Chair told a nation that despite recent progress in the fight versus inflation, that he or they... were coming for you, your job, your standard of living, the welfare of your household. The promise made was to damage the US economy in order to bring year over year consumer level inflation back to 2%. The method will be to continue to sharply increase short-term interest rates while methodically draining the economy of its oversized monetary base, and to keep those short-term rates at elevated levels while that QT liquidity vacuum hums along.

Mindless

Understand this. Part of the plan is a much tougher environment for labor markets, and to destroy the "wealth effect" that the Fed worked so hard to create. The plan will require significant month over month deflation. Month over month disinflation will not be aggressive enough. The -0.1% month over month PCE print for August was not even acknowledged by the policy hawks, a group that now includes all of the former policy doves.

I wonder just what is the public tolerance for sizable, sustained month over month contraction in consumer pricing? I wonder just what the political tolerance for such an environment will be? It will not be pretty. Blame will be cast in every direction.

On Wednesday, Cleveland Fed Pres. Loretta Mester, who does vote on policy this year, joined the chorus of Fed officials more or less pledging their commitment to a thoughtless, even mindless, inflexible approach to monetary policy. Mester said... "My current view is that it will be necessary to move the fed funds rate up to somewhat above 4% by early next year and hold it there. I do not anticipate the Fed cutting the fed funds rate target next year."

Now, Mester is not the first Fed official to talk tough concerning 2023. I wonder about this. How can a group of economists who have already proven themselves completely incapable of accurately predicting economic conditions on a quarterly basis, speak with such confidence concerning conditions through the end of next year? We all know that the quarterly FOMC economic projections are really the stuff of comedy. How arrogant? Are these characters simply under orders from somewhere? Because someone regularly batting under .200 does not step to the plate with supreme confidence.

The Ugly

On Wednesday, Russia halted the flow of natural gas through the Nord Stream 1 pipeline to Europe for three days as large scale war games involving Russia, China, India and a host of other Russian satellite nations kicked off. Russia claims that the shutdown was necessary for essential maintenance work to be done. Yeeaaah.

The Uglier

Late Wednesday, the Financial Times reported that Chinese internet giant Tencent (TCEHY) would be pivoting away from its stake-building strategy to focus on asset divestment as the firm comes under pressure from investors. According to reports, Tencent has outlined a target of divesting the equivalent of roughly $14.5B of its listed $88B equity portfolio this year.

The Ugliest

Apparently, the Chinese metropolis of Chengdu, which is the capital city of Sichuan province, will head into Covid-related lockdown. This shutdown will impact approximately 21M people. Until this point, western China had been far less impacted by Beijing's Covid-Zero policy than had other parts of the country. The lockdown starts (has started) on Thursday after 157 cases of Covid had been detected. The shutdown will impact Toyota Motor Corp (TM) , Intel Corp (INTC) , and Foxconn Technology Group, which by extension possibly implies Apple (AAPL) .

Wednesday

Yes, professional money continued to head into cash. There was no widespread panic. Just the steady drumbeat of bids being hit after of course there was an early attempt to rally US equities that failed. Take a look at this...

This is a close-up snapshot of the chart that we showed you 24 hours ago, with one exception. Wednesday has been added. Now, go back two weeks and take a look at what happened on August 16th when the S&P 500 just barely kissed its 200 day SMA (simple moving average). Sharp rejection! Now, on Tuesday, we marveled at the lack of support provided by the 50 day SMA as the index sliced through that level like a hot knife through butter. See what happened on Wednesday at that spot? Wow. Let's look at what happened at the 50 day SMA (4014) in real-time...

So, the algorithms that disappeared on the way down when the level could have provided support, lined up at that line to sell anything they could there, putting an abrupt halt to any thought of a technical rally on Wednesday. That rejection was as sharp as what we saw at the 200 day line about two weeks ago. Will there be a second attempt? Does this set up the next leg down? Already? The world is an ugly place right now. The environment for margin is not improving.

August "jobs day" is ahead... No way to win. Should labor markets weaken, they weaken. Should labor markets show strength, the Fed will only increase their rhetoric in attacking economic activity. Three day weekend. Oh joy. Then, the wonders of September and October. Always a couple of squirrely months for the markets. This time more than most.

The Nasdaq Biotechnology Index closed in the green on Wednesday. Why do I mention that "less focused upon than most" index? It was easier than listing the 21 indexes on my watchlist that all shaded red for the day on Wednesday. Note that while breadth continued to be awful and it has since Powell's speech that aggregate trading volume just keeps increasing. On Wednesday, trading volume across the Nasdaq Composite reached the trading volume 50 day SMA for that index for only the fifth time in August, as the S&P 500 experienced its busiest day of the month and second busiest day since June.

I avoided some, not all of the intense pain, by reacting to that rejection at the 200 day line, ahead of Powell (I thought I was overreacting at the time), and of course during Powell as that was unreal. What positions I did leave in place have continued to soften. For the first time in my professional life, incredibly... I am majority cash. I would have to be convinced to change that posture going into the weekend.

Chips Ahoy?

You have likely noticed that former Sarge fave Nvidia (NVDA) is down more than 5% overnight. Late Wednesday, Nvidia disclosed that the firm had been notified (on Friday) by the US government that their A100 and forthcoming H100 products will require US approval prior to being sold to Chinese or Russian customers over concerns that they could be used for military purposes. Nvidia provided that its outlook for the current quarter, that included $400M in potential sales to Chinese customers, may be subject to the new requirements.

Advanced Micro Devices (AMD) was similarly informed, but stated that it doesn't expect any impact from said restrictions to be material. Both companies had already stopped doing business with Russian customers on their own.

At least We Have This...

Not sure how this will be received. On Wednesday, the FDA approved applications by Moderna (MRNA) and Pfizer (PFE) /BioNTech (BNTX) to release their Covid-19 vaccines that specifically target the strains of the virus currently spreading in the US. The new vaccines/boosters that are designed to protect against Covid's original strain as well as the BA.4 and BA.5 sub-variants of the Omicron strain will supposedly be rolled out ahead of a government booster program this fall.

These two "bivalent" vaccines have been approved, but have not undergone human trials. Officials have relied upon data provided by a previous "bivalent" developed by Pfizer/BioNTech that targeted both the original strain as well as the original Omicron (BA.1) sub-variant. That shot provoked a better immune response than did the original vaccine without triggering new safety concerns. Like with the earlier vaccines, the Moderna boost will be authorized for those 18 years of age and older, while the Pfizer/BioNTech jab may be given to those 12 and up.

Economics (All Times Eastern)

08:30 - Initial Jobless Claims (Weekly): Expecting 249K, Last 243K.

08:30 - Continuing Claims (Weekly): Last 1.415M.

08:30 - Unit Labor Costs (Q2-rev): Flashed 10.8% q/q SAAR.

08:30 - Non-Farm Productivity (Q2-rev): Flashed -4.6% q/q SAAR.

09:45 - S&P Global Manufacturing PMI (Aug-rev): Flashed 51.3.

10:00 - ISM Manufacturing Index (Aug): Expecting 52.1, Last 52.8.

10:00 - Construction Spending (July): Expecting -0.1% m/m, Last -1.1% m/m.

10:30 - Natural Gas Inventories (Weekly): Last +60B cf.

The Fed (All Times Eastern)

15:30 - Speaker: AtlantaFed Pres. Raphael Bostic.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (CPB) (.56), (HRL) (.41), (SIG) (2.59), (TTC) (1.13)

After the Close: (AVGO) (9.55), (LULU) (1.85)

(AAPL, NVDA, and AMD are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

At the time of publication, Stephen Guilfoyle was Long AAPL, AMD equity.