Stock investors are all asking the same question... can we trust the recent rally? The market just rallied +5.7% in two trading days. Bulls argue that the rebound could push even higher as the start of Q3 earnings season starts up next week and estimates have been taken low enough that many companies will again beat expectations. At the same time, the Fed doesn't meet again until early November so the headlines might shift more towards corporate earnings being better than expected. US employment We also just had one of the first big signs that US employment might be starting to ease. Yesterday's JOLTs report showed US nonfarm job openings fell about -10% from July to August, from 11.17 million down to 10.05 million. One of the biggest monthly pullbacks we've seen in years. For reference, job openings peaked in March of this year at around 11.85 million and have been slowly falling. There were +4 million more job openings than unemployed workers in August vs. 5.9 million in March. Bulls want to believe the signs of a slowing economy mark the beginning of the end for inflation. In fact, investors are mostly in a "bad news is good news" state of mind as a slowing economy, in theory, should pave the way for a less aggressive Federal Reserve tightening program, if not an outright pause in rate hikes. Bulls hope to get more "bad news" from ADP's private payroll report today as well as the Labor Department's official September Employment Report on Friday. Analysts expect ADP will show payroll growth of +200,000, slightly less than the gain of +250,000 expected for the official jobs report on Friday. Keep in mind, ADP's methodology may still be off after switching things up this summer. The payroll company showed a gain of just +132,000 jobs in August versus the Labor Department's figure of +315,000. Bears are quick to point out, the US labor market is still extremely strong, and we continue to see way more "job openings" than those who are actually looking for work. This means employees still seem to have the upper hand and continued "wage inflation" will work to keep inflation supported. Tensions and inflation are still an issue Bears also point out that geopolitical risks remain high as Putin continues to threaten nuclear action, China remains a huge mystery in regard to Taiwan, and now North Korea is launching long-range missiles over Japan. The bulls think the Fed is going to ease or even reverse their hawkishness then all of a sudden, we get another CPI report (next on due out Thursday, October 13th) that shows inflation remains hot and nowhere near the Fed's goal of getting back to around 2%. From what I've been hearing, several insiders on Wall Street are still looking for a +8.0% headline inflation number and a +6.5% core inflation number. In other words, it's hard to imagine the Fed is going to back off or reverse its recent course of action until they are absolutely certain they have slayed the inflation dragon. Personally, I think they still have more work to do and they fully understand they are going to create a little pain in getting us there. I don't think they are going to flinch at the first sign of a little blood. Longer-term, they known they have to get the patient (the US economy) off the drugs and painkillers and the process might be hard to watch as the patient shows serious and painful withdrawal symptoms. Investors today are also anxious to learn OPEC's latest production decision with the group rumored to be considering a cut of some -1 million barrels per day. Oil prices have been on a pretty steady decline for the last four months amid lower global demand and fears of recession. The strong US dollar has also created headwinds for the market. It's believed Russia is primarily behind the push to make such a large production cut as a way to boost prices. Analysts say this is because Russia will likely have to offer price concessions on its oil once a new EU embargo becomes effective in December. Experts are divided as to whether the cuts would have the intended impact as it would come amid a very sharp demand contraction in both China and Europe. Of course, if the demand picture changes and/or oil prices do indeed shoot back up, it could again fan the inflation flames.

EUR/USD - 0.9972 Yesterday's impressive rally from 0.9807 (Asia) to as high as 0.9999 in New York due to broad-based USD's weakness on falling U.S. yields and market's risk-on sentiment suggests recent rise from September's 2-decade trough at 0.9837 remains in progress, however, overbought condition would cap price below res at 1.0050 and risk has increased for a retracement to occur. On the downside, below 0.9900 signals 1st leg of correction is possibly over and brings weakness towards 0.9853, however, reckon 0.9807 should remain intact. Data to be released on Wednesday Australia services PMI, Japan Jibun bank services PMI, New Zealand RBNA interest rate decision, China market holiday, Germany exports, imports, trade balance, current account. France industrial output, Italy S n P global services PMI, France S n P global services PMI, Germany S n P global services PMI, EU S n P global services PMI, U.K. S n P global services PMI. U.S. MBA mortgage application, ADP employment change, international trade balance, goods trade balance, S n P global services PMI, ISM non-manufacturing PMI, Canada building permits, trade balance, exports and imports.

It is a new quarter and investors went on a shopping spree – stocks rallied by more than 3% - investors expecting a FED pivot. Oil rallied by 5% as the OPEC decision looms. Treasury yields fall as some are betting that the FED will pivot! US futures are up again today as the FED pivot story continues – are you seeing a pattern yet?  Try the Baby Pumpkins Stuffed with Pumpkin/butternut Squash Risotto. BOOM!  It is the start of the 4th quarter 2022 and what a start it was….buyers taking control of the market – either that or sellers finally became exhausted – taking the pressure off…..Economic data yesterday morning showed some weakness….the ISM Manufacturing PMI fell to 50.9…just a hair above neutral and below what was expected….while the S&P Manufacturing PMI rose to 52 – slightly higher than the expectation….construction spending falling by -0.7%, new orders fell to 47.1 and total vehicle sales strong, but less than expected….the RBA (Reserve Bank of Australia) was supposed to raise rates by 0.5% and they chose to surprise the markets and raise by only 0.25%......which was interpreted as a ‘slight pivot’….because the expectation was for a 0.5% rate hike…. It was the start of a new quarter…. stocks had gotten smashed during the 3rd quarter and so, as we have discussed at length – there were bargains (think Bloomies) everywhere you looked.  Some of the biggest names and sectors that had gotten beaten up as PM’s and investors raised cash ahead of what is (was) expected to be a difficult time were the biggest beneficiaries….The rally started before the opening and continued after the bell rang – climbing higher and higher…by the end of the day – the Dow gained 765 pts or 2.6%, the S&P up 92 pts or 2.6%, the Nasdaq up 240 pts or 2.2%, the Russell up 45 pts or 2.6% while the Transports gained 405 pts or 3.3%. The XLK (tech etf) rallied by 3.1%, XLC (communications) up by 2.8%, XLI (industrials) up by 3%, XLE (energy) up by 5% - but to be fair that’s all about the pending OPEC + decision due out tomorrow when the meet in Vienna – rumor has it that they are about to announce a 1 million barrel/day CUT in production to stop the bleed, to stop the price of oil from going lower…..XLV (healthcare) up 2.8%, XLB (basic materials) up 3.2%, XLF (financials) up 2.8%....the SPXL (S&P triple levered long) jumping by 7.2%, Semi-conductors – SOXX – which has gotten absolutely smashed (down 40% ytd) rallied strongly as well – rising 3.5%, Cyber-Security (CIBR) up 2.8%, Artificial Intelligence (BOTZ) up 3%, Fossil Fuel names like BTU and CRK up 5% and 4.5% respectively – taking those two names up 161% and 123% ytd – this as Europe braces for winter…and hello….we have been talking about these names for months.  And as you would expect – the contra trades suffered…right?  The DOG down 2.6%, the PSQ down 2.4%, and the SH down 2.5% - the SPXS (S&P triple levered short) down 7.8% All very exciting…. but you have to ask yourself is this just a ‘relief rally’ or is this the start of something new?  Has the picture completely changed between what investors were focused on last month and yesterday?  Last week showed us that the core PCE Deflator – the FED’s favored data point - rose… (which is not good) while yesterday ISM Manufacturing PMI fell (slightly) – and suddenly we reached peak inflation and that means the FED will pivot? The RBA raises by less than expected and that means that the FED will follow suit? Suddenly there is this sense that the one weaker macro data report supports a FED pivot – really?  So, the stronger S&P PMI means nothing?  Or the stronger PCE core deflator is useless?  OK…. I get it…. focus on the data point that supports your position (which makes sense) vs. suggesting that the markets were in well oversold territory and were ready for a boomerang rally…. It is the start of earnings season and while earnings have been positive so far – the estimates are coming under pressure as the global economy begins to show signs of stress and inflation continues to rob consumers forcing them to make tough choices…..At the beginning of the quarter – 3rd qtr. earnings estimates showed a 9% increase y/y – that estimate has been cut to 2% now…..a significant decline….which corresponds to the significant decline in stocks…..So now, it appears as if investors are already expecting a weaker quarter and if we get a weaker quarter then that could end up being positive for stocks….I guess it just comes down to defining  – what is ‘weaker’?  Have the estimates come down enough?  Well, we are...

The Reserve Bank of New Zealand is seen raising OCR by 50 bps to 3.5% in October. The focus will be on RBNZ’s policy guidance after the dramatic NZD fall has fed into inflation. A surprise 75 bps rate hike now seems off the table after the RBA hiked by only 25 bps. The Reserve Bank of New Zealand (RBNZ) is set to extend its rate hike trajectory into the fifth straight meeting on Wednesday. New Zealand’s inflation at a three-decade high combined with the dramatic fall in the kiwi dollar makes a compelling case for more central bank tightening. Is a 75 bps hike on the table? The RBNZ is widely expected to increase the Official Cash Rate (OCR) by another 50 bps from 3.0% to 3.5% when the board members meet on October 5. Such a hike would mean the central bank hiked policy rates by 50 bps for the fifth meeting in a row. This policy announcement will not be followed by a press conference with Governor Adrian Orr. Economists predict the central bank will deliver a half percentage point rate hike at this meeting as well as the meeting in November. A majority of them expect the OCR to reach 4.00% or above by the end of 2022, 50 basis points higher than August’s Reuters poll. At its August policy announcements, the central bank said that they “did not consider 75 bps rate hike today,” while explaining that “50 bps moves have been orderly and sufficient.” The RBNZ raised its forecast of the terminal rate to 4.1%, implying another 100-125bps of rate hikes in the offing by mid-2023. Heading into the rate hike decision, however, New Zealand’s inflation rate stands at a fresh three-decade high of 7.3% while the economy averts a recession in the second quarter, as eased Covid measures help spur 1.7% GDP growth. Meanwhile, the recent dramatic fall in the New Zealand dollar is likely to keep inflation elevated as a cheaper currency makes import prices higher. These factors build a case for a 75 bps rate hike by the kiwi central bank. Will the central bank favor a super-sized rate hike? Probably not, especially after the Reserve Bank of Australia (RBA) slowed its tightening pace by delivering a smaller-than-expected 25 bps rate hike on Tuesday. The Australian central bank noted that more tightening is needed ahead while justifying that the “cash rate has been increased substantially in a short period of time.” Governor Adrian Orr, during his recent appearance, remarked that the tightening cycle is “very mature” but he did also stress that there is still some work to do. His comments failed to ramp up expectations for a 75 bps rate hike in October. Another factor that could ward off Orr and company from delivering a bigger rate hike is looming downside risks to the country’s property market. Aggressive rate hikes could deepen the post-pandemic slump in the property sector. Additionally, the economic slowdown in China and growing recession fears worldwide could also temper the bank from going for any aggressive rate hike. Trading NZD/USD with RBNZ decision NZD/USD could see a fresh downswing towards its 2022 lows at 0.5565 on a ‘sell the fact’ effect should the RBNZ go for the expected 50 bps rate lift-off. In case the central bank surprises with a 75 bps rate hike and/or comes out more hawkish concerning its policy guidance, the kiwi pair recovery could gather strength and target the 0.5900 area. The persisting risk trend, however, will have a significant influence on the pair's reaction to the RBNZ decision.

Wild swings in sterling create a risk of contagion. Apple suffers a massive meltdown, and Tesla misses deliveries. Credit Suisse in turmoil as bank moves to reassure investors. It was an incredible week in financial markets, which is something we seem to be saying every week lately. This one truly was,however, due to the sudden risk of a mini-Lehman event in the UK spreading havoc across global markets. The big news was in the UK where sterling reacted negatively to the UK borrowing a bucket load of money to basically cut taxes for the top 10%. By eliminating bankers' bonus restrictions and also eliminating the top rate of tax, the new UK Prime Minister and Chancellor set out on a very shaky path. Sterling markets reacted with fury over plans to increase borrowing, sending sterling and UK gilts into free fall. The Bank of England then intervened in gilt markets to try and stem the damage. Later we learned the reason was a near meltdown in the pension industy, which would have led to a mini-Lehman moment. This sent risk assets into a tailspin and put the dollar once again on the charge. Sterling fell to a record low versus the dollar before correcting on the Bank of England intervention. This Bank of England intervention was basically a pivot and so risk assets took off higher on the news. Investors have been hoping for a Fed pivot to put a floor under risk assets all year. Soon it became clear that this may be a case of being careful with what you wish for. The Fed is only likely to pivot if we are entering another financial crisis. However, we do notice some stress in the messaging from Fed officials. They have been pretty uniform in their hawkish assessment of late, but on Friday we heard from Lael Brainard who mentioned financial stability worries. This was a noted divergence from the latest Fed missives and indicative of a potential pivot.  The macro environment remains challenging, and we have already gotten close to a major (or perhaps formerly major) economy in the UK reaching a breaking point. That increases the risk of a system breakdown, and Bank of America is out with a timely warning on the US Treasury market. Sober reading!

UK manages to avoid negative Q2 growth “The FTSE 100 is lagging on a day that has once again shone the limelight on the UK a week on from the chancellors highly contentious mini-budget. Soaring mortgage offers have grabbed the headlines, with lenders reacting to recent market turmoil by hiking their borrowing rates in anticipation of greater instability and a reactive Bank of England. Nonetheless, we have seen homebuilders enjoy a relatively upbeat session, with the OBR now expected to provide their initial budget forecasts on 7 October. The Truss/Kwarteng double act will be back in the limelight this coming weekend as the Conservative Party Conference kicks off on Sunday, but there are precious few signals that the controversial tax hike for top earners will be withdrawn. From a market perspective, the pound has managed to recoup the entirety of the budget sell-off against the euro and dollar, but the gilt markets tell us another story. Fortunately, the surprise 0.2% GDP reading for Q2 helped alleviate fears that the UK was in recession as claimed by the Bank of England, but pressures are sure to ramp up as we move towards a difficult second half of the year.” Eurozone inflation hits double figures “In a week that has focused in on UK woes, the latest inflation readings out of the eurozone highlighted the battle that if being faced across the entire continent. 10% inflation across the eurozone pushes the ECB to continue hiking to drive down consumption, while the 17.1% figure out of the Netherlands serves to highlight just how difficult the task is to create monetary policy that is appropriate for 19 states. With Russia annexing regions of Ukraine, and the Nord Stream pipelines out of action, European inflation will likely remain elevated as they pay a premium to import energy from further afield. “