The Worst of Both Worlds
Earlier this week, TD Ameritrade's lead anchor, Oliver Renick, suggested that we were likely heading for a worst-case scenario: a recession with inflation still hot enough that the Fed would be compelled to continue to raise rates during it:
The worst-case scenario for investors right now is that the economy slows down, but the Federal Reserve has to keep hiking interest rates anyway. It looks like that's what's happening.
Last month ended with a wave of bullish optimism over a collapse in commodity prices and drop in bond yields. People are interpreting this to mean that inflation is peaking and so the central bank can back off its tightening path. The breakout in the U.S. dollar tells us that's not likely happening, and the collapse of the last standing Treasury yield curve means we're almost certainly in some kind of recession.
Consistent with Pozsar's Prediction
Renick's prediction that the Fed would raise rates through a recession is consistent with Credit Suisse strategist Zoltan Pozsar's comments back in May about how the Fed had effectively ditched its dual mandate in light of extraordinarily high inflation.
The NY Fed wunderkind-turned-Credit Suisse strategist on why the Fed's helicopters are dropping "financial napalm" this time. $SH $WEAT $TECS $BOIL https://t.co/hKLjrgLKse
— Portfolio Armor (@PortfolioArmor) May 17, 2022
While the Fed's dual mandate would normally require it to try to maximize employment while controlling inflation, Pozsar argued that inflation was so bad that the Fed would be willing to increase unemployment in order to fight it.
Enter The CPI Print
Wednesday's CPI print showed the highest month-over-month increase in the headline consumer price index since the early 1980s: 1.3% (versus economists' expectations of 1.1%). In the wake of that news, raising the odds of a 100bps rate hike later this month.
Nomura Now Sees 100bps Rate Hike In Two Weeks, As Bostic Says "Everything Is In Play" https://t.co/RdUUic3f9u
— zerohedge (@zerohedge) July 13, 2022
Positioning For Higher Rates
As regular readers may remember, our system doesn't take into account the macro picture when ranking securities; instead, it gauges underlying and options market sentiment to estimate which names will perform best over the next six months. Nevertheless, sometimes its top names collectively paint a macro picture. On Tuesday, ahead of Wednesday's CPI report, that picture wasn't the clearest one.
Screen capture via Portfolio Armor on 7/12/2022.
Despite the pullback in petroleum over the last month three of Tuesday's top ten names were in that space: Helmerich & Payne, Inc. (NYSE:HP), Occidental Petroleum Corp. (NYSE:OXY), and Scorpio Tankers, Inc. (NYSE:STNG). Two were in solar, including Daqo New Energy Corp. (NYSE:DQ); three were in biotech, including the surging Monkeypox play SIGA Technologies, Inc. (NASDAQ:SIGA); and one was a bet against emerging market stocks, Direxion Daily Emerging Markets Bear 3X Shares (NYSE:EDZ), and one was a bet against U.S. Treasury bonds, ProShares UltraPro Short 20+ Year Treasury (NYSE:TTT).
It will be interesting to see what sort of shift we see in the top ten Wednesday night. As always though, we suggest anyone buying any of our top names consider hedging them in case we end up being wrong.
