Inflation, Recession And The Fed

S&P 500 bears had three good reasons to force a close lower – high consumer inflation expectations, weak retail sales and Waller saying that however you look at it, inflation is too high and doesn‘t allow the Fed to declare mission completed. While the rebound into the close was both in value and tech, the market breadth (shown in the next chart), remains disastrous (check divergencies to Feb values), and both S&P 500 and Nasdaq remain highly selective.

Disruptive tech (AI driving semiconductors) remains well placed together with other asset picks shared shortly before Christmas:

(…) I‘m also bullish oil stocks ($XOM, $SLB), copper, nickel, lithium, cobalt. This is the decade of resources, necessities of life, precious metals and disruptive technologies while general Nasdaq troubles are to continue. Just check the Nasdaq to oil ratio for clarity.

So, we have tech stocks to outperform value in the current low growth environment, would the thinking go, however if you check market breadth in Nasdaq, the bearish divergence in the making is even worse than in S&P 500. It‘s the big names and semiconductors holding it up, while advance-decline line and new highs-new lows are largely struggling.

Don‘t forget the (some 3 months ahead) debt ceiling impasse – Treasury is thus far drawing down its General Account at the Fed (what was $355bn early Mar is only $113bn now), while the Fed is shrinking its balance sheet, and at the same time deposits from both small and big banks are going to money market funds and similar.

M2 continues declining, LEIs are firmly negative, ISM manufacturing at 46 is the average of when recession has been declared (in my opinion, recession though isn‘t here yet still thanks to most consumers still going through the excess savings – and that‘s delaying the onset), and the deposit outflows make for less commercial credit expansion possibilities. Real estate likewise hasn‘t bottomed yet – neither commercial nor residential (and that would weigh on both banks and consumers), job market is sliding as per my schedule, and earnings estimates for the overwhelming majority still to report, seem likewise too optimistic to me still.

While we‘re getting disinflation (that‘s what‘s spurring the greatest disconnect threatening stocks), it‘s the headline figure driven by retreating energy – this though has stopped being the truth regarding oil – yet core inflation (both core CPI and core PPI) don‘t mirror that optimism.

As I stated in late 2022, the Fed is trying to avoid the 1970s mistake of not attending to inflation expectations (as these risk becoming unanchored), hiking too fast, causing a recession, and having to cut. This time, Powell is determined to go slow, and keep rates restrictive, slightly restrictive in a bid not to cause recession, even if the Fed (correctly and not only for this reason) acknowledged recession risks in 2H 2023 as sharply up thanks to the spring banking crisis.

All of this combined translates into what I told you a week ago – USD relief rally, a few points‘ upswing coinciding with risk-off turn in the markets, is approaching as much as the talk of dollar double bottom. It had already sent precious metals packing Friday – but my 2023 star pick of PMs remains unchanged, but we‘re likely to correct first before overcoming gold highs as it becomes later in 2023 obvious that the Fed would have to step up to the plate and start buying assets again.

Let‘s move right into the charts (all courtesy of

S&P 500 and Nasdaq Outlook

S&P 500 and Nasdaq

Alarming show of market breadth, and any weakness would start first in value stocks. Some parts of tech would be hit too, but the semiconductors and heavyweights are to get it last. Get it as in still continuing to outperform. But I still think that the upcoming weakness in utilities, consumer staples, real estate and banking, would overpower brighter spots elsewhere.

My 4,188 level was predictably rejected Friday, but bulls are likely to try still as Friday‘s appetite shows. The break of 4,115 has to wait, there isn‘t yet enough confirmation to speak of in the bond market. Monday‘s manufacturing data (crucially though Friday‘s manufacturing and services PMIs) would provide some bearish fuel.

Credit Markets


The risk-on move is wakening, and junk corporate bonds stand a good risk of having to adjust to the downside quite fast. When fresh debt issuance restarts with the usual pace, yields would be tempted to rise again – the current times are those of a temporary reprieve.

Gold, Silver and Miners

gold, silver and miners

Precious metals correction is returning, and it means volatile trading until the USD rebound becomes clearly recognized as one targeting 105. We aren‘t there yet, for now it‘s only froth that‘s being taken from gold and silver.

More By This Author:

Banking Vs. Recession
PPI Vs. Fed
CPI Fireworks Told You

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