Good morning contrarians! It is Friday, Oct. 14.
Yesterday was one of the craziest days on Wall Street that you’re likely to experience. First, a hotter-than-anticipated inflation report caused stocks to sell off at the open. Then things suddenly reversed around mid-morning. The rebound was as ferocious as it was inexplicable, with no immediate catalysts emerging to justify the change in sentiment. By the end of the day major US indexes were all up more than 2%.
Many explanations have surfaced that attempt to explain yesterday’s phenomenon. Few hold much water. Perhaps the most plausible argument is structural. Brent Kochuba, former podcast guest who knows a thing or two about this, writes:
“We saw a ton of positive delta trades off of the open. It was call buyers and put sellers. We think that forced dealers to buy futures, which sparked the short cover rally.”
Kochuba and the folks at SpotGamma put together a short video that gets into this a little more.
State of Play
As of 0630 there are few signs of clear direction:
Stock futures aren’t doing very much. The Russell 2000, which tracks small caps, is up 0.3%. The other indexes are hogging the break-even point;
The action in the bond market is a little more interesting, especially at the long end of the curve:
The 10-year yield is down 6 basis points to 3.89%;
The 2-year yield is down 3bps to 4.42%;
UK gilts continue to recover, up 3%.
Commodities are moving a bit lower, with WTI crude oil down ~1% to trade around $88/barrel;
Cryptos are gaining ground, with Bitcoin up 4% to trade around $19,700.
Bank Earnings
The major Wall Street banks report earnings today: JPMorgan (JPM 0.00%↑), Morgan Stanley (MS 0.00%↑), Citigroup (C 0.00%↑), Wells Fargo (WFC 0.00%↑), and US Bancorp (USB 0.00%↑) are all due before the open at 0930.
You have to look beyond EPS and revenues when it comes to bank earnings. Things like loan loss provisions drawdowns and the like. JPMorgan’s Jamie Dimon is usually good for some commentary on the state of the economy that is worth watching.
Consumer Reports©
A bunch of data on the US consumer is due today. Retail sales are out at 0830. Economists surveyed expect this number to increase by 0.2% month-over-month, down a drip from the 0.3% seen last month. Core retail sales, which exclude autos, are actually expected to decline by 0.1% MoM, which is less than the -0.3% seen last month at this time.
Then we have the University of Michigan Consumer Sentiment survey out at 1000. There are two of these each month but the second just pretty much confirms what’s in the first, which is this one. So this is the one worth watching. Economists expect this number to increase to 59.0 from 58.6 but the devil is very much in the details, including what survey respondents say about current conditions and inflation expectations.
The Bottom Line
Today will be telling after yesterday’s insanity. Normally one would think the retail reports and bank earnings will weigh heavily on investor sentiment, but after the trading activity yesterday it feels foolish trying handicap what might happen today.
None of this means we should throw the fundamentals out the window. After all, the initial move yesterday was a direct reaction to the CPI print. That may have caused second- and third-order effects, but it did initially proceed as expected.
At least bank earnings are less binary than one CPI report that everybody was waiting for. They’re also far more complex and it will likely take investors a little bit of time to parse exactly what they mean. In other words: it’s not the type of thing you can set your algorithms to and push ‘go.’
That doesn’t mean we won’t see this type of thing again. This is the stage of the cycle where there is a lot of volatility. We were fortunate that yesterday’s result was a move to risk-on. Next time, it could be the opposite. If there’s any consolation it’s that there aren’t very many events as binary as a CPI print. But when they do appear on the calendar, we will need to pay special attention.
One Plausible Explanation for ’Turnaround Thursday’