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Stocks Emerge From Bear Market As End Of Fed Rate Hikes Priced In With Recession Looming

Stocks Emerge From Bear Market As End Of Fed Rate Hikes Priced In With Recession Looming

There was an interesting headline earlier this afternoon in Bloomberg, which tried to explain today’s furious rally which pushed e-minis right back out of bear market territory:

It’s a good headline, unfortunately it’s dead wrong, because while stocks did in fact snap a three week losing streak and also averted being down for a record 11 out of 12 weeks…

… with every single sector closing solidly green…

… the reason for said snapping was just the opposite of optimism because with a recession now assured…

… what prompted today’s furious short squeeze, because that’s what it was – a short squeeze of the most shorted names…

… was the market’s realization – helped by our explanation yesterday – that a recession means the Fed will end its hiking cycle much sooner than previously expected, most likely some time around the mid-term election…

… with markets now pricing in just a 71% chance of a 75bps rate hike in July, and less than a 100% chance of 125bps in rate hikes through the September meeting (including the assumes 75bps next month)….

… while both Dec and Feb rate hike odds plunged…

… in a clear reversal in market sentiment, which now expects a major dovish U-turn by the Fed in just a few months.

The declining odds that the Fed will keep hiking until it sees “whites in the eyes” meant that the recent capitulation, which just saw the biggest equity outflows in 9 weeks, is rapidly being reversed…

… and together with this week’s powerful short squeeze, we have gotten a sharp, violent move higher which sent the spoos to 3,900, the highest in more than 2 weeks…

…  just before the S&P slumped into a bear market. Which makes sense since today’s 100 point emini ramp has pushed the market right out of bear market territory.

And while the market’s realization that a recession is now the baseline certainly helped, it was the unexpected news from the final UMIch inflation expectation print for the next 5-10 years, which was revised down from 3.3% to 3.1%, meaning that the “unanchored” inflation expectations that Powell saw and was freaked out by (in his own words), never actually happened and was revised away before it even hit the history books!

Today’s meltup was enough to almost undo this week’s rout in oil, which after plunging 7.5% last week, and slumping earlier this week, staged a dramatic bounce on Friday, rising as much as 3%, and just barely closing red on the week. Needless to say, oil – and energy stocks – remain the best performing asset and sector of 2022, and the fact that this space is bouncing hard suggests that traders are already starting to price in the coming Fed easing which will slingshot commodities even higher.

There were less fireworks in the bond space today, where the 2Y yield drifted modestly higher, closing just over 3.04%, in a much more subdued session than yesterday’s epic plunge in 2Y yields which saw a nearly 20bps move lower as the end of the Fed’s rate hikes at the end of 2022 and the coming recession got priced in.

And yes, following the CPI shock yields have drifted sharply lower and are now just fractionally higher compared to where they were before the “blackout period” CPI prompted Powell to panic.

In retrospect, this will be just the latest Fed panic that turns out to be a dud.

Finally, after many left the space for dead following last Saturday’s daisy-chained margin calls and liquidations, cryptos have moved sharply higher, with bitcoin +20% and eth +40% from last Saturday’s lows… 

… which reminds us of what we said then, that “once the dust settles, Powell capitulates and the liquidity firehose goes into overdrive again, a few years from today everyone will again be asking why they did not take advantage of today’s buying opportunity…”

Tyler Durden
Fri, 06/24/2022 – 16:00

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