Mini Market Lookback: Macro Grab Bag 12-14-24

Equities had an ugly week in breadth with numerous benchmarks and ETFs in the red while the UST saw another bear steepener.

Dec 14, 2024

What?! Get rid of the FDIC?! Thank God I am 100% in gold.

The week saw setbacks in equity market breadth and another round of UST weakness with a CPI release that was waffling but a PPI follow-up that was on the warm side.
The policy noise remains high (notably in Canada) as the retaliation planning works its way into the Canadian press and more contingency planning gets circulated from China. All of it is damaging to the US (that is why they call it retaliation) (see CPI Nov 2024: Steady, Not Helpful 12-11-24).
Bank regulatory overhaul was heating up in the headlines with rumors around the elimination of the FDIC that included rolling up some of duties under the Trump-controlled US Treasury. As we look back to the March 2023 regional bank crisis, such a structure would put systemic bank system support as one more item (e.g. tariff targeting, tariff exemptions, government contracts, etc.) under the broader umbrella of political patronage as deposit safety might come down to “friends in high places” (aka influence peddling). “What if?” scenarios on the regional bank run are not hard to frame (see SVB Reprieve: Hail Powell the Merciful 3-12-23).
A big week of economic releases will be jammed into the pre-Christmas period with indicators such as (in chronological sequence) Retail Sales, Industrial Production, Housing starts, FOMC cuts/new dot plot, the final 3Q24 GDP numbers, Existing home sales, and then Personal Income & Outlays and the PCE price index to end the week. That is a big -pre-holiday meal to consume.
The global geopolitical calculus might be mistakenly seen as simplified with Assad fleeing Syria to start the week and related setbacks for Russia (military bases, fleet fleeing, bases emptying out) and Iran’s network in disarray. Meanwhile, Ukraine lurks as a nightmare for the history books. The concerns around global trade are still the biggest short-term threat in the economic risk basket with the clock ticking. Trump has not yet tagged the EU, but that is inevitable.

The weekly returns for the 32 benchmarks and ETFs we track clearly show an ugly pattern at 5-26 and one zero on the positive to negative scoresheet. Only one line item in the top quartile was above +0.5% in a sign of a bad week. Separately (not shown), the S&P 500’s 11 sectors weighed in at 2 positive (Telecom, Consumer Discretionary) and 9 in negative range.

NASDAQ was slightly positive, but the S&P 500, Midcaps, and Small Caps were all negative with the Dow (not shown) also in the red. The -2.6% for the Russell 2000 was notable on the topic of more US-centric benchmarks. The Equal Weight S&P 500 ETF (RSP) at -1.6% was 1 point behind the Mag 7 heavy S&P 500 benchmark.

All 7 bond ETFs were in the red with the long-duration UST 20+ Year ETF (TLT) in dead last at -4.5% and the longer duration IG Corp index (LQD) in the third quartile. Interestingly, the short duration UST 1Y-3Y ETF (SHY) placed near the bottom of the top quartile with negative returns. That means a bad week for equities.

The top quartile saw the Consumer Discretionary ETF (XLY) at #1 with a good Tesla week with NASDAQ at #2 and Communications Services ETF (XLC) at #5. China-influenced ETFs in EM Equities (VWO) and Base Metals (DBB) firmed up. There has been some interesting chatter on the fallout for metals if nations under tariff siege (China, Canada) see supplier chains disrupted and even take action on export taxes in retaliation moves that will drive up both base metals and strategic metals. Canada is a massive supplier of commodity resources to the US.

The tech bellwethers had a relative celebration vs. the broader equity markets with Broadcom serving as an extremely positive outlier at a +25% handle for its weekly returns. As broadly covered in the headlines, the spike was less about the strong earnings report but instead more about the guidance on how much major customers would be spending.

We excerpt the relevant commentary from management below:

“…we currently have 3 hyperscale customers who have developed their own multi-generational AI XPU road map to be deployed at varying rates over the next 3 years. In 2027, we believe each of them plans to deploy 1 million XPU clusters across a single fabric. We expect this to represent an AI revenue serviceable addressable market or SAM for XPUs and network in the range of $60 billion to $90 billion in fiscal 2027 alone. We are very well positioned to achieve a leading market share in this opportunity and expect this will drive a strong ramp from our 2024 AI revenue base of $12.2 billion… To compound this, we have been selected by 2 additional hyperscalers and are in advanced development for their own next generation AI XPUs. We have line of sight to develop these prospects into revenue-generating customers before 2027 and could, therefore, expand SAM significantly”

That sent Broadcom equity (AVGO) off to the races. The AI and hyperscaler boom is one of those multiplier economic effect trends (more like a multiple of the multiplier) flowing into everything from power (utilities) to data center capital budgeting, land values, and construction activities.

On a side note, we have been reviewing the extraordinary trend line in Iron Mountain valuations and operating performance (we will publish this coming week). IRM is a name that is seldom covered by sell side data center equity analysts since it is not a pure play.

One of the themes during 2024 from the AI boom has been the ability to capture power and land capacity that can be reliably delivered in a market with supply-demand imbalances. As complex as AI and data centers can be, the concept of unbridled demand and limited capacity is one the market is embracing in the form of 1999-style valuation methodologies but with much more profitable companies that present lower financial risks.

Meanwhile, “Midriff Musk” can keep jumping up and down looking at his net worth with a fresh double-digit return for the week. That weekly climb of 12% comes after a post-election rally that has wiped out any remaining TSLA negative trailing time horizon returns in this table. As a frame of reference, TSLA had a -38% trailing 3 year return in the pre-election weekly edition (see Footnotes & Flashbacks: Asset Returns 11-3-24).

The role of Musk from the perch of White House influence from EVs to Aerospace and Defense to numerous other areas of economic influence (AI) return him to the 1000-pound gorilla of roll-your-own financial model and inflated (maybe, maybe not) expectations. Love him or hate him, he is crushing it on all fronts right now (except the clear need for “ab work” is he insists on short shirts). His ability to use his influence to undermine government support from OEM mass producers mired in EV losses is not a small risk factor for the non-TSLA EV business lines. He has a friend in a high place who has been anti-EV and anti-subsidy.

The above chart breaks out the UST deltas from Friday-to-Friday, and it is not hard to see how the long duration 20+ Year UST ETF (TLT) ended up on the bottom and interest rate sensitive equities took some fresh body blows. In the simplest terms, it was bad news for duration – again. As noted earlier, all 7 bond ETFs were in the red for the week even with the FOMC teed up for -25 bps this week and CME odds at 96% as the week begins.

The above chart updates the 10Y UST vs. Freddie Mac 30Y mortgage benchmark. The Freddie Mac number is released on Thursdays at noon. The past week was a bad one for mortgages generally. Mortgage surveys (away from Freddie) in the market with different mortgage populations hit a multi-week low the prior Friday. Mortgage News Daily was at 6.95% on Friday (12-13), so the news flow is more about 7% than 6% as the near-term focal point.

The path into the new year and how the market will digest a forward-looking view on tariff fallout is subject to a lot of political noise. We see economists juggling conceptual twists as they play creative wordsmiths (My personal favorite is “It is not inflation. It is just higher prices.”). That is one of the Jedi Mind Tricks tariff apologists use. It is “reduced household purchasing power” even if you call it a rose.

Many economists either downplay the tariff debate or play the role of partisan prostitute. It is the downside of the dismal science when economist can get flexible and reshape the concepts and variables to their own political bias. It has been going on forever (left and right) as we saw with diehard free trade economists joining Trump 1.0 and turning themselves into boned fish on the way to a full-throated embrace of protectionism.

The tariff debate in general and what happens in the economy includes a long list of variables (pricing power, exemption politics, currency trends and import price offsets, etc.). It is a separate topic for another day, but there are growing headlines around export taxes in Canada on a wide range of commodities (notably strategic metals and mined materials). The same idea has been emanating from China.

Export taxes are to exact revenge on buyers but also hurt domestic constituencies. That is more easily executed in China than Canada when domestic provinces scream bloody murder (Alberta, Saskatchewan). The Canadian press saw some of that topical debate this week in a sign the government is preparing its retaliation arsenal even if the first choice is “peace in our time” on trade.

The above chart updates HY spreads after a week of minimal action at +1bps wider on the week to +268 bps. That keeps HY spread levels back in the June 2007 credit bubble zone and the same for IG spreads (see HY OAS Lows Memory Lane: 2024, 2007, and 1997 10-8-24, HY Spreads: Celebrating Tumultuous Times at a Credit Peak 6-13-24).

The “HY OAS minus IG OAS” quality spread differential widened by +4 bps on the week to +190 bps. As we cover in our Footnotes publication on credit markets, anything under +200 bps is rarefied air (see links at bottom).

The “BB OAS minus BBB OAS” quality spread differential widened by +7 bps on the week to +7 bps as the BB tier widened by +3 bps and BBBs tightened by -4 bps. We see intermediate IG corporates and the HY lite BB tier as the safer play on the relative symmetry of duration and fundamental risks.

We have been through plenty of periods of HY bond and IG bond underwriting excess, but this has not been one of them (treating private credit as its own world). Since arriving in NYC back in June 1980 (22% misery index), we have not been through what is likely to shape up as the most radical set of Federal level (White House) policy actions on the economy since Nixon (exit stage right on gold standard, wage-price controls, etc.). That promises to make 2025 the wildest Federal policy period since the early 1970s (Note: we consider the Volcker years in 1980-1982 as a Federal Reserve monetary thing and not about White House policy).

Trump’s trade policies will come after decades of US interests and policy makers reshaping the global economy from supplier chains to multilateral institutions (notably WTO) governing many aspects of economic life.

The temporary rush of “breaking sh*t” will give way to an economic hangover that will last and lead to repercussions. Since partisan policy makers will not admit the obvious risks (tariffs raise costs or prices or both), pondering the unintended ones will come in time for the market if the policies do end up as more than headline talk. There could be a high risk that trade goes from order to disorder and maxes out economic entropy but then turns into something bad in enthalpy (notably with China/Taiwan).

See also:

Toll Brothers: Rich Get Richer 12-12-24

CPI Nov 2024: Steady, Not Helpful 12-11-24

Footnotes & Flashbacks: Credit Markets 12-9-24

Footnotes & Flashbacks: State of Yields 12-8-24

Footnotes & Flashbacks: Asset Returns 12-8-24

Mini Market Lookback: Decoupling at Bat, Entropy on Deck? 12-7-24

Credit Crib Note: Herc Rentals (HRI) 12-6-24

Payroll Nov 2024: So Much for the Depression 12-6-24

Trade: Oct 2024 Flows, Tariff Countdown 12-5-24

JOLTS Oct 2024: Strong Starting Point for New Team in Job Openings 12-3-24

Footnotes & Flashbacks: Credit Markets 12-2-24