Is the Stock Market Done Falling? Don't Get Your Hopes Up If This Happens, Says Ilya Spivak

[00:00:01][music] is it really turn around Thursday.

[00:00:16]Markets recover aggressively across the board. We're going to see what this is all about and whether it has scope to continue. This is macro money. I'm I Spivac, head of global macro here at Tasty Live. And what we are asking ourselves, of course, on a day like today where uh the markets of course had an explosive selloff, uh we are looking now at that sell-off unraveling rapidly. Um and the question becomes okay are we ready to really say that the story has changed and so we'll go directly to the price action. We'll pick apart the moves that have transpired here uh and then see what's coming up next. Here's the S&P 500. We can see we had a break of that range that we were looking at yesterday. This was major major technical damage and today we come roaring back. Now it's tempting to say that we've broke back into the range, but of course this is where we need to be flexible. Uh support and resistance are never just a line. They're usually an area. And so what we're looking at here is essentially a retest.

[00:01:38]We're kind of testing back against these lows. And indeed, if we zoom in here a little bit closer, we can see that we're kind of grinding where we were on the way down. So, where we came in and stopped to digest before yesterday's breakdown, that's where we are again. Is this a convincing reversal back higher?

[00:02:02]Time will tell. Uh we may see that come tomorrow uh and say, "Okay, well, this really was a legitimate reversal." uh or it may fail.

[00:02:14]But for the moment, we are back to essentially retesting whether the market really wants this breakdown. Uh it's a similar story in gold, although here the turn is more violent. We end up erasing almost all of yesterday's bar in the process of also erasing the push through this spike low that we had down here.

[00:02:38]Now again the big breakdown in gold was here.

[00:02:42]So we might rally all the way back into here, find some level of resistance and this sort of shallower decline resumes from there. So this may yet be just an overshoot or the bounce to here may yet be a selling opportunity. But certainly the turn here is considerable and has to be taken seriously.

[00:03:08]Now, what's interesting on the oil front is it still doesn't really go anywhere.

[00:03:15]And so, tempting though it is, and certainly the financial media have taken this ball and ran with it today, um to look at the president having essentially cancelled the strikes he was threatening on Iran because u he needed them to apparently sign the memorandum of understanding to start the conversation about ending the war. Mind you, this is not a peace deal. Uh this is a a document that would say we're going to start talking now.

[00:03:46]That would u o ostensibly set the stage for some kind of a peace deal. But who knows? We've gotten to the place as of yesterday where the talking had been dragged out so long that again the president was uh threatening to move things along by bombing there. Well, we've canled the bombing because apparently we're going to get the progress. Signing of theou is apparently imminent.

[00:04:18]But crude oil doesn't break out of its range. And so the idea that this is some sort of ending of the war trade or that crude oil is going to magically start to flow through the straight of Hormuz even if there is a deal to end the war, which this is not. That's not what the market is showing here.

[00:04:35]If the market thought it could extrapolate all the way that far, then perhaps it would, but it hasn't.

[00:04:42]And so interestingly here, crude oil looks at this and says, "Yeah, whatever's happening in sentiment is probably not what is the headline e explanation because whatever this means for the price of energy doesn't seem to mean that the market is prepared to say it means an unclenching of the war trade premium on oil and its inflationary implications.

[00:05:10]However, the bonds look very interesting indeed because as stocks rebound and as gold rallies, bonds do too.

[00:05:20]And so this whole thing starts to look like a story about the unclenching of interest rates. And the idea that maybe the market got ahead of itself when it fully discounted one rate cut or one rate hike rather for the Fed for this year. Maybe that was a bridge too far.

[00:05:41]When we look at the dollar, we see it continues to hug the top of its range uh essentially where it's been oscillating for the better part of a year. Uh this is the peak here from uh late July going into August last year. Uh and we can see we've rallied back into that rangetop and we've been holding there for a few days. the do uh the dollar doesn't really make meaningful moves away from this level. It's kind of uh lower relative to where it was a day or two or three ago, but the breakout is still very much holding and the overall sort of architecture of the move uh very much remains. We're just still digesting here to see if we have the wherewithal to break higher beyond this uh multimonth barrier right here.

[00:06:36]Now, as far as the data is concerned, we have probably a more potent catalyst, but it's perhaps not the catalyst that people think it might be.

[00:06:48]We get the producer price index today that of course follows CPI yesterday and we see that core inflation holds steady.

[00:06:58]Headline inflation uh extends higher as you might have expected. uh against the backdrop of what's been going on here.

[00:07:07]Uh and so we get a report that's as far as its overall sort of settings here does not seem as scary as it might have looked. Now, the month-on-month increase in headline PPI ends up being larger than expected, 1.1% versus 0.7% expected. But the rise in core is a little bit softer, 0.4% versus 0.5 expected. The yearon-year core reading ends up holding steady at 4.9% against expectations of a rise to 5.4% even as the headline number jumps to 6 and a half% just a touch more than expected. The forecast was 6.4.

[00:07:59]So we get the kind of fire and fury at the headline, but in particular looking at the core, the increase is actually a bit less than what was feared.

[00:08:17]And when we look at the internals, not surprisingly, um the part of this that's the most inflationary is on the good side. And where that's the case, it's energy. We can see that clearly. Uh there is uh no big shock here. And when we look at the internals, the most striking thing perhaps is just how much of an inflation shock we have here.

[00:08:47]And perhaps the most interesting thing here to note is that these bits right here, residential electric power uh and residential natural gas, those things that hit consumers the most directly, we're talking about around 4% inflation here, yearon year. The reason these look small is because the jump in gasoline, jet fuel, heating oil, and and diesel is just astronomical. The price of diesel has doubled. The price of jet fuel has more than doubled. The price of gasoline has almost doubled.

[00:09:25]And obviously this is very relevant for um consumers. The price of heating oil has almost doubled and so or at least is growing at a pace to double year on year or close to double year on year. So these are astronomical increases in the cost of fuel inputs. Uh and of course even though this part of it looks much smaller than this, it's because this is so huge considering the Fed is targeting 2% inflation, a 4% rise here is not helpful.

[00:10:04]But of course a rise of almost 75% yearonear here is much more uh ominous.

[00:10:12]Now, when we look at the services, the key here was to see if we can find some evidence of spillover to say, okay, this inflation shock uh from the war, the energy jump, it's spilling over into some sort of a broader uh concern about what's going on with um inflation in a kind of service sector way. Um that would be of course the kind of thing that would get the Fed concerned. That would be the kind of thing that would be a driver of uh potential rate hikes. That would be where sort of that fear would start to see evidence.

[00:10:54]And when we look inside this data, couple of interesting things emerge. So here of course on the service sector side we already see for a second month in a row now it's transportation and warehousing services. So the energy heavy part of the mix where we get the um impact and not surprisingly all across the board all things that are powered by prochemicals we get a um a lift. though airlines, freight, trucking, all across the board. Now, obviously, it's not a stretch to say that all of this is an input into uh what's uh going to be a price that consumers eventually face. Because if getting your Amazon package delivered to your door is this much more expensive, well, is that going to impact your consumption?

[00:12:04]Maybe. Depends what you're buying. And so you you get where this becomes a stickier concern.

[00:12:13]But then when you look at the wholesaler's margins component, you start to really get some eyecatching information because what you find here is that the place where margins are the most constricted is automobiles and auto parts and the place where still you get the best margins, not surprisingly fuels and lubricants retailing. So selling things that are now expensive is not surprisingly an attractive proposition and selling things that are uh increasingly expensive to use because of the rise in oil is increasingly unattractive.

[00:13:00]It would see because the margins here are clearly declining. So, we're looking at wholesalers having to slash their uh piece of the pie essentially in order to protect demand. That is not uh seemingly uh the recipe for um shielding the consumer from whatever this shock seems to be.

[00:13:29]Then of course we look back at CPI and we find yes indeed this confirms what we saw there.

[00:13:38]Of course here the energy shock is the biggest deal but note services creeps back up to inflation north of 2%.

[00:13:48]So we're moving away from the Fed's target now at what is easily the most significant component of consumer inflation.

[00:13:58]The headline of course is at four, but we can see that half of that is just this.

[00:14:08]And of course there's a big um component here almost one and a half percentage points. That is the energy shock. But this now is the evidence of spillover. And as we showed yesterday, uh, of course, services are the big component here and transportation services, that is to say, things sensitive to the cost of fuel is the driving force.

[00:14:37]But even if we look at what's going on inside this core goods situation, what we find is that the reason core goods prices fall is a decline in used cars and trucks. So again, demand destruction. This is of course exactly what we end up seeing here where we see margins for the selling of autos and auto uh parts are getting squeezed.

[00:15:10]In other words, the cost of energy and in particular the cost of fuel is already hurting sales of expensive dependent things of course cars um very much front and center here in this data.

[00:15:27]So we seem to be looking at demand destruction directly in front of our face.

[00:15:35]And so just as we said when we were looking at the core CPI numbers yesterday, we have a pickup in services inflation. It is now at the highest since back in January.

[00:15:48]We have a decline in goods inflation, but apparently for the wrong reasons because it's not like the war has unclenched or tariffs have gone away. or change dramatically month to month here.

[00:16:01]No, this looks like people are actually reducing the demand pull impetus on prices. That is to say, demand is declining.

[00:16:13]The price shock is already crowding out consumers is what this suggests. And so when we look at the probabilities for what the Fed will do, we start to see evidence that what we're actually watching here is a decline in rate hike probabilities, but perhaps for the wrong reasons.

[00:16:36]Now we're looking at about a 6040 chance of a rate hike at the December meeting. So looking at still better than even odds of a hike but much lower than the certainty with which we came in on Monday. The markets had this at all but done close to 100%.

[00:16:58]At the start of this week and clearly we're not there anymore.

[00:17:04]And so with that in mind, uh we start to look at this uh and say, "Okay, well, if this is what we're looking at, and if this is the reason that bonds are up, well then should we be happy?

[00:17:27]Is the stock market reading this correctly to say, "Oh, goody. The cost of money won't be as bad as we feared."

[00:17:34]So this is a reason to be happy about where things are going.

[00:17:42]Is that the the correct interretation?

[00:17:47]And if the reason that the Fed is cutting rates is demand destruction, well then it's not exactly the thing that an asset class like stocks, which depends on there being consumer uptake, really ought to be cheering for perhaps.

[00:18:09]And this of course brings us directly to the University of Michigan consumer confidence uh numbers that are going to be uh coming at us over the course of the next 24 hours. Now the expectation here is that we are going to uh set a um further decline here um but not so much as dramatic. So, we hit a record low at 44.8 in the last reading. It looks like we're looking for a slight improvement here.

[00:18:47]Um, largely driven by uh an improvement in the current conditions u component looking at the forecasts. Uh, and if you then look at uh the expectations for inflation, the one-year inflation outlook becomes the bogey. So needless to say it's been going up uh and that has been a consistent squeeze on sentiment. So we can see for example here is the tariffs from last year and here is the war. We can see when one year inflation expectations spike here sentiment declines and indeed as it has jumped and then held relatively high. So too sentiment has diminished. Now again the market's looking for this to be a bit of an improvement this go round perhaps because people are acclimating but if these numbers on CPI and PPI and the sort of demand destruction that they imply are going to be telling then there could be a downside surprise here showing that the consumer is in fact more pessimistic wouldn't really be that much um of a change considering we're already at record lows. But it would certainly mark a sense that what is going on here is already less about the immediate situation on the ground in the straight of Hormuz and uh in the broader Middle East conflict and more about the damage that's already been done to the economy as a consequence of all of this. And we've been talking about this since yesterday. We can see crude oil is still holding within its range. But these break even inflation rates uh baked into the bond market that approximate inflation expectations over the five and 10 year um uh tanner here. They've been falling having rallied with crude oil almost tick for tick especially the fiveyear break even into this week. And what that seems to be starting to show is maybe this is less about again the immediate implications for the price of oil which doesn't look to be unclenching uh in any kind of a meaningful sense uh at this stage yet and more about this is going to be a price shock that is already hurting demand. And the lay of the land is of course ominous because already in the first quarter we saw that investment in this case driven mainly by the AI buildout the construction of data centers at a feverish pace outpaced consumer spending as a contribution to overall GDP. Now it wasn't the greatest rebound in GDP to begin with. GDP averaged about 4% in the second and third quarter of last year once the dust settled on the unveiling of those tariffs. But of course in the fourth quarter we had a government shutdown and GDP got crushed all the way down to just half of a percent. The rebound in the first quarter was only to about 2% in fact less than that on second revision here and consumer spending contributed less than 1%.

[00:22:06]to this rebound whereas we can see uh the investment component contributed a bit more. That's of course a striking thing as we've discussed because investment is only about 14 15% of the economy whereas consumer spending is 68%.

[00:22:23]So to have this, a tiny slice of the pie, relatively speaking, contribute more than this, you'd have to have this growing really, really fast, and this slowing.

[00:22:38]Well, that's of course exactly what we saw. Business investment surged and added in excess of 10% uh annualized rate um contribution.

[00:22:51]So very strong growth. Meanwhile, the consumer retrenched for a second consecutive quarter.

[00:22:58]And so the natural question then becomes, well, how sustainable is this?

[00:23:04]When you consider that higher input costs from energy, as we just saw, freight, all of those things that are squeezing consumers, well, they're squeezing data center builders in exactly the same way.

[00:23:16]They need energy as well. They need to get building materials, buy them, and move them to where they construct things. All of the same things that hurt consumers then hurt them in exactly the same way and for exactly the same reasons.

[00:23:32]So, how sustainable is this?

[00:23:35]Well, if you were to get meaningfully weaker on a part of GDP that's 68% of the total, it really wouldn't take much more weakening to overwhelm even this aggressive pace, especially if it took even just a little bit of a step lower thanks to this new cost structure. And so we're looking at a situation that understandably then starts to fuel growth concern.

[00:24:02]So maybe what we're looking at now is something of a handoff where stocks might very well remain hampered, but bonds might be done falling.

[00:24:13]And so we don't necessarily have the confirmation here yet because of course as we look at these charts, we're still testing the top of the range. We haven't broken out. But if this becomes a breakout, well then this will become again a story about rate cuts, just the wrong rate cuts and a story about diminishing growth and recession less so than just a flash in the pan oil shock.

[00:24:39]So as far as exposure is concerned and uh I hear your comments uh saying that it's difficult to uh read this only because before I opened these up so you can actually see the trade structure.

[00:24:51]It's too long of a list and doesn't fit on the slide uh anymore. So, uh we'll talk through [snorts] it and then see if maybe we can uh figure out some sort of a solution. Uh but I've taken profit on my gold short. Um that seems to have been wise uh considering it was the meat of the portfolio. Uh and um we we had that dramatic reversal, but I'm still long the dollar.

[00:25:21]I am still short the bonds, although I might very well be uh pulling uh a 360 there. Uh if the bonds break out and closing up these shorts and getting long instead, just flipping the position over. I'm still long the drivers of inflation because it doesn't look like anything's unclenched there. So, I still have call verticals in uh natural gas and oil. Uh I'm still outright short these uh micro futures uh for the Aussie, the pound, the euro against the dollar. I've got uh put verticals uh in TLT and outright puts in IEF. I've got a put vertical in um Bitcoin that's uh still on. And uh I'm still looking at uh short call verticals in the stock indexes, the Q's, SPY, and IWM because again, it doesn't look like the turn has been confirmed so far. But if it is, well then it'll be time to flip that over too. But we don't have that confirmation yet. So let's see what consumer confidence brings us. And that is macro money for today. As ever, we are here right after overtime. That's a show that I co-host with Chris Veio, looking at the Wall Street close and where things may go there from. I am also writing for the news and insights portion of tasty live.com and commenting on former Twitter and on blue sky at Ilaspac. If you're watching this on YouTube, like and subscribe. Macro Money returns next week on Monday. See you there, everybody. Happy trading.