End of hikes, end of growth
June 23, 2022
–The message from the interest rate market is becoming more shrill: a recession is coming fast. This conclusion probably isn’t good for stocks but hold the thought.
–For a while the lowest contract on the euro$ strip was EDM3. The idea was that Fed tightening would be over by the middle of next year. Then, on June 13, EDH3/EDM3 inverted at settlement…and hasn’t looked back (-9.5 settle). So, EDH3 became the cheapest contract on the strip. But yesterday EDZ2/EDH3 inverted…and was trading negative 2 late (-0.5 settle). The market has moved the end of hikes up to the end of the year. The lowest (most inverted) spread is EDH3/EDH4 at -47.5.
–Consider EDU2/EDU3. On June 10 it was 87. Yesterday’s settle was 26.5, and shortly after settle it was 23. It’s almost astonishing that a 1-yr spread like EDU2/EDU3 could be below 1/4% while a 1-month spread like Oct/Nov FF could be 36.5. (FFF3/FFF4 settled -23.5!) Spreads from 2023 to 2024 are telegraphing an unmistakably bearish economic signal, although further back the curve is actually steepening. Yesterday reds settled +20.25 while golds were only up 12.25.
–Now, what does that mean for stocks? The economy is expected to grind to a halt. Look at the bbg base metals chart. It had a half-hearted bounce at the 38 pct retracement and is now looking at 50%. The 50% for SPX is ~3500. Do earnings really hold up where the administration is jawboning constantly against profits? My answer is no….we’re not in the Kansas of an accommodative Fed and a capitalistic govt any more. From Chevron CEO’s Mike Wirth letter to the President: “…your administration has largely sought to criticize, and at times vilify, our industry. These actions are not beneficial to meeting the challenges we face…”
