European markets lead the push higher, with the backlash for Liz Truss serving to warn off any potential governments seeking to employ a pro-growth policy. Meanwhile, Goldman Sachs closes out a period where US banks have highlighted ongoing economic risks despite improved margins. Stock gains highlight warning for those considering pro-groth strategy “European markets have continued the upbeat tone that has permeated through financial markets this week, with the DAX a particular outperformer after gaining 2%. The FTSE 100 has unsurprisingly lagged its European and US counterparts, highlighting how a resurgent pound will typically mute any recovery as internationally-focused stocks see their earnings devalued. While the UK is filled with concern over rising costs thanks to Jeremy Hunts less generous stance as Chancellor, the prospect of a tighter economic environment brings expectations that inflationary forces can be trimmed earlier than would be the case under Kwarteng’s pro-growth budget. Markets are clearly more optimistic after the UK’s missteps provided a stark warning that an expansionary government stance would simply prolongue the crisis if pitched against a central bank seeking to drive down inflation.” Goldmans beat estimates but future remains clouded “Goldman Sachs revealed better-than-expected earnings for the third quarter, with a 11% rise in trading revenues helping to lift the bottom line after a disappointing quarter for their investment banking arm. Soon both will be one entity, with the bank restructuring in a bid to simplify the business and step away from their retail banking offering. This represents the final major US bank to report, with investors continuing to watch for a collapse in activity on Main street as the cost of living crisis develops. While we are yet to see a major dent in consumer activity, the outlook remains unclear as higher rates bring both improved margins and lower demand. “

Outlook: The calendar includes industrial production and the Empire State manufacturing index (forecast at -5 from -1.5). Later in the week we get permits and starts, existing home sales, the Treasury capital flow report, Philly Fed, jobless claims, and more, with inflation numbers and the ZEW out of Europe. Information overload, as usual. It’s hard to ignore Friday’s Atlanta Fed GDPNow update–a tiny drop to 2.8% for Q3 from 2.9% (and based on a tiny drop in real personal consumption expenditures growth. We get another one on Wednesday. Notice how choppy the chart is–way up, then way down, then way up again. Also, the current reading above and outside the blue-shadow most-likely range, so presumably we should expect a drop any time now. This brings up the question of whether interest rates can or should be based on or at least correlated with economic growth. We’re pretty sure rates should not be zero or negative (ever), but what is the relationship? Conventional economics indicates a rise in rates is inversely correlated to growth and “should” suppress it. But just as low and negative real rates do not necessarily drive fresh growth (only asset bubbles), historical data over long periods of time and after financial crises do not bear this out. In other words, the current conventional thinking is (ahem) wrong. That means inflation targeting in the short-term is bad central bank policy, too, and not just because of our favorite bugaboo, Lag. Just for kicks, check out a chart from The Economist last week showing the 12-year average of bond yields weighted by GDP driving relentlessly to zero over centuries. It’s hard to know if The Economist has its tongue in its cheek showing this chart, although the economists behind it seem serious enough. Alternative economists would say this chart misses the point and weighting by GDP is what ruins it. How about a chart showing that real rates and GDP lack a strong correlation? There is a correlation, but it’s weak and inconsistent, and some economists fiddle with the data to adjust the timeframes and other modifications to make lags go away and the model to look accurate. The BIS spent a decade complaining about precisely this point when zero and negative rates failed to boost growth. The point here is not to quarrel with conventional economics or to embrace the second-tier alternatives, but to point out that if the bond vigilantes are concerned with short-term self-interest, there is a growing cadre of “correct target” vigilantes who see the Fed and other central banks as too little concerned with growth and overly concerned with inflation. The outcome is the same–the Fed will overshoot in its aggressive tightening. Overshooting is not exactly what the latest WSJ poll says, but it does say the probability of a recession in the next 12 months is 63%, up from 49% in the July survey. The WSJ economists panel expect GDP to contract 0.1% in Q1 and 0.1% in Q2. It’s of some interest that the FT reports comments from several of the US big banks and they do not see any cracks in their business. Bottom line, again its seems obvious that the dollar can rise alongside rising yields and an aggressive Fed, with two 75 bp hikes now expected before Christmas. That doesn’t mean we won’t get some profit-taking and/or short-covering in other currencies, as we see in sterling now. We could also see some hiving off into emerging markets now that risk-on may be returning now that the UK has fended off a crisis, apparently. Tidbit: The price action in the stock market last Thursday, which could not in any way be attributed to the inflation report, was weirdly anomalous. The stock market “should” have fallen on the news. Instead it rallied by over 5% and closed up more than 2.5%. We may be getting something similar today–an equity rally just as the WSJ panel of economists forecasts the probability of recession at over 50% for the first time. This is one of those times when trying to make a cause-and-effect explanation falls flat on its face and raises the question of how much fresh news and/or economic reality affects stock prices. The answer is that most news-based explanations are BS in the first place, a scary thought. How else to figure out what the market will do next? Well, charts. This time the S&P in particular was reaching what looked like a cyclical bottom. Those who bought when selling got exhausted were rewarded. The secret is seeing where sellers run out of steam. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep...

Europe European markets look set to end a turbulent week very much on the up, although we are slipping off the highs of the day, and while the DAX looks set to finish higher for the second week in a row, the FTSE100 has had a much more difficult week. The task for the FTSE100 has been much harder, having hit a 20-month low yesterday, the UK index did look as if it might be able to reverse most of this week’s losses, however that prospect disappeared after the confirmation of the latest UK government U-turn, and the latest 1-year inflation expectations survey for the University of Michigan surged to 5.1% in October, serving to also pull US markets sharply lower. This week’s volatility in UK bond markets has had a significant effect on the FTSE100 with wild swings in house builders, consumer staples and banks. These moves have been driven by the sharp rise and fall in gilt yields, with the sharp moves lower in yields over the last 24 hours helping to pull these sectors off their lows, although today’s price action has been more subdued. Weighing on the FTSE100 this afternoon has been weakness in energy and basic resources with concerns over recession acting as a drag on commodity prices.   Ocado shares appear to be getting an uplift after it was announced that Kroger in the US, agreed to buy one of its rivals Albertsons. Ocado has a distribution deal with Kroger’s which generates a significant amount of income so the addition of Albertsons real estate could well add a lot of value to this proposition. Royal Mail, which was renamed International Distribution Services earlier this month has seen its shares fall sharply after announcing the loss of up to 6,000 jobs, and the prospect of increased losses. With the company losing over £1m a day and talks with the unions deadlocked, something had to give and with the disruption caused by strike action, job losses became almost inevitable. The sad thing is that today’s job loss figure is higher than would have been the case if industrial relations were more cordial. With the company operating against much nimbler peers with a lower cost base the company is not only haemorrhaging cash but also losing market share. Further strike action will only make that situation worse and result in more job losses. In H1 of this year the company reported an operating loss of £219m, against a profit of £235m a year ago, with the company saying that £70m of that was down to the 3 days of industrial action.  On the outlook IDS says it expects to see a full year adjusted operating loss of £350m, which may increase to £450m if customers move their business away in response to the prospect of further strike action. Because of the threat of further strike action, management have said they are unable to offer a clear outlook for the year. The reaction of the CWU suggests that this dispute has some way to go, with the lack of trust between management and unions resulting in many more job losses. One thing is certain, no business can sustain these sorts of losses so let’s hope common sense prevails.   US US markets opened higher after US retail sales came in slightly below expectations at 0%, although the previous month was revised up to 0.4%. On the control group measure this came in better than expected rising to 0.4%, which appears to show that despite rising prices consumers still have the appetite to spend money. These gains soon started to look vulnerable after the latest University of Michigan short term inflation survey saw a sharp surge in October, rising to 5.1% from 4.7% in October.    It turns out vegan options are losing popularity if Beyond Meat’s latest numbers are any guide. The company has reduced its full year revenue forecasts to $400m to $425m from an upper target of $520m, while saying that Q3 revenue came in at $82m, well below the $115.6m expected. The company also announced it was cutting 20% of its global workforce. JPMorgan Chase Q3 numbers have seen revenues come in at $33.49bn, beating expectations of $32.35bn, while profits came in at $3.12c a share, above the $2.91c a share. Digging into the details, Q3 investment banking and FICC sales and trading beat expectations, coming in at $1.71bn and $4.47bn, while equities and sales trading revenue came in short at $2.3bn. One notable item, and it was something that was expected, was a big increase in provisions of credit losses to $1.54bn. This was well above expectations and appears to indicate that JPMorgan expects to see trouble ahead. JPMorgan also reported losses of $959m on sales of US treasuries with CEO Jamie Dimon saying...

A busy end to the week, as UK Prime Minister Liz Truss sacked her Chancellor Kwasi Kwarteng and announced another U-turn in her government's tax cut plan. Find out exactly what happened and how markets reacted to the latest news.  We also tie in the latest developments in the UK bond market after Bank of England Governor Andrew Bailey told pension funds “You have three days to get out". A brave move or asking for trouble? Finally, Thursday marked one of the largest intraday reversals in the US stock market on record. The initial move lower came after US Core CPI printed at a new 40-year high, but why did we rebound so quickly? Piers explains why the devil is always in detail!

Markets turn lower as we head towards the weekend, with Liz Truss budget reversal seeing economic uncertainty traded for political instability. UK political turmoil provides a fourth chancellor of 2022 “Kwasi Kwarteng has been ousted from No 11 just three-weeks on from the fateful mini-budget that was ultimately responsible for his demise. Liz Truss remains in charge for now, but there are rumours that her decision to reverse the corporation tax cut will do little to help her stay in the post much longer than Kwarteng. For traders, today has provided yet another bout of unpredictable volatility, with the risk-on momentum driven by falling yields reversing as political turmoil takes hold once again. Unfortunately for Truss, her swift ability to spook markets with a swathe of unfunded spending plans is now being followed by yet another rise in yields as markets wonder whether we could soon see another push to replace her.” Tale of two halves as morning rally starts to turn “Market volatility has continued apace today, with yesterday’s post-CPI rebound proving fleeting if this afternoon’s turnaround is anything to go by. Traders are keeping a close eye on yields, with the recent pullback providing the basis for a risk-on market move. However, with core inflation at a 40-year high, another 75bp hike in November, and a raft of declining earnings figures expected over the course of the coming month, it is easy to see why traders remain largely pessimistic. Today has seen the big banks provide an insight into exactly how the industry fares when rising interest rates meet crumbling consumer sentiment. The improved margins afforded by rising rates have helped drive a beat on both bottom and top line growth for JP Morgan. However, risks lie ahead for the banks, with growing expectations that we will see lending, M&A, and housing come under pressure as rates rise.“

Beware of narratives aimed at explaining market reactions, but it's crucial to have a go at the immediate market reaction and reverse course to the latest CPI report showing fresh 40-year high in US inflation. The sharp selloff in indices, metals and bonds lasted no more than 20 minutes, followed by a stabilization that took around 15 minutes before a powerful rally ensued into US lunch time. CPI was indeed hot, but core goods prices were unchanged. What about the action in FX and metals? Any bear market rallies there? Soaring from the abyss, but Friday always a test Before we start with FX and metals, it's crucial remind of the implications of bear-market rallies. We saw last spring several instance when market closed up above 2% to return from an intraday loss of 1-2%. Today's bounce in the S&P500 bears more significance as the index is set to close up more than 1% after having fallen by more than 2.5% earlier in the futures session. Most impressively, the rally in the S&P500 emerged to rally of the abyss of 3490 level (50% retracement of the rise from the 2020 lows to this year's highs). It also managed to close above the 200-week MA of 3600.  The other remaining test is Fridays. The last time major indices closed Friday in the green was on September 9th. Today's bullish engulfing candle certainly suggests a Friday up session. But next week is a whole different test.  Yuan, US Dollar Index and gold USDCNH (often a better proxy for USD than the DX index) continued to fail at the 7.20 resistance, coinciding with the twin highs from Aug 2019 and May 2020. The chart shows what happened to gold and DXY after each of those peaks. A similar story ensued at the double top of Dec 2016 and November 2018.  Let's not forget how silver has embarked a on a 6-week uptrend of higher lows, as did copper.  Combine this with the inflection points of CNH and XAUUSD and we bulls could start taking October seriously—even though the bigger test remains in November (FOMC and US midterm election) China observers may also add president Xi Jinping would want a firm currency into next week as the National Congress of the Chinese Communist Party kicks off its 20th edition this Sunday. What if Xi announces a spending-lend growth plan, powering global risk and commodity markets higher? Why not? DXY shows a similar lower highs formation seen in US 10-year yields or their UK counterpart.  But we've seen that pattern before—when DXY stabilizes at the 21-DMA and resumes a fresh run. The more pertinent details are found below. USD/JPY finally broke above its high from August 1998 high of 147.66 by one pip. The pair is up 22% so far this year, and up 44% from the 2021 lows. The Bank of Japan may have benefited from a shift in attention away from it towards the dangerous battle between the Bank of England and Chancellor of Exchequer. Whether the BoE's emergency gilt-buying program is a stark reminder of what happens if/when the BoJ terminates its yield curve control policy is increasingly being considered by global markets.  But first, will the BoE stick to its decision to end the 13-day gilt-buying program? Will it do so only after a monstrous buying operation? Or will it extend it? These are all band-aid solutions to the real problem of the Chancellor of the Exchequer. Failure to reverse his tax cuts could turn the BoE into the BoJ.