Real Wages Turn Negative Year-Over-Year

Not ideal for consumer cyclical stocks

Highlights

• Effects of extreme complacency were on full display yesterday

• Futures pricing is closing in on the Fed’s dot-plot

• The CPI print was all about rents, health services and auto insurance

• Non-confirmations emerge in the high yield market

While We Were Sleeping

The vagaries of a +22% fifteen-week rally. Complacency hit extremes of late when the VIX slipped below 13 as the put-to-call ratio on the top 50 stocks plunged to levels last seen in early 2021. At the recent peak, the market was trading +13% above the 200-day trendline and +5% above the 50-day, which is extreme. Only 51% of S&P 500 stocks are now trading above their 50-day moving averages, the fewest since last November.

The key yesterday was not just the negative price action but the fact that volumes rose as the selling accelerated (despite the dip-buying into the close). The Russell 2000 quickly reversed course and closed -4% lower and the KBW bank index was crushed nearly -3% on the session.

Here are the updated odds on the Fed — all it took was for the CPI and core to miss consensus views by a whole 0.1 percentage point to cause a full rate cut to be priced out yesterday!

• March cut is at 10% (was 20% on Monday)

• May is less than 50/50 (30% from 50%)

• June is seen as the first cut (wasn’t that long ago that it was March)

• 3.5 total cuts for 2024 (from 4.5 cuts on Monday — it was just a few short months ago that it was 6!)

• We have gone since mid-January from pricing in -175 basis points of Fed rate relief this year to -90 basis points (that happened fast!)

The swaps/futures market is now closing in on the Fed dot-plot. Pricing out more than two cuts, as we found out, is worth nearly +50 basis points on the 10-year T-note yield. As we have shown and proven, there is nothing more powerful than Fed policy when it comes to where yields go out the Treasury curve — a historical 90% correlation.

The question then becomes, what happens if the Fed starts to get really antsy and ends up removing those three cuts as per the latest dot-plot? The last time we had little priced in for 2024 was back in October, and the 10-year yield back then was sitting near 4.7%. Something for us all to consider.