In 30 seconds: Nasdaq-linked equities including software and major tech names have entered correction territory, with the QQQs and XLK falling 10%+ from recent highs amid rising yields, elevated implied volatility, and a surge in IPO activity historically associated with weaker forward returns. Ongoing US-Iran military tensions and a partial blockade of the Strait of Hormuz have driven sharp oil price swings, with WTI briefly topping $90, US petroleum stocks falling sharply, and retail gasoline prices subsequently pulling back from late-May highs. With inflation persistently above the Fed's 2% target and the May CPI report providing no clear resolution, debate is intensifying over whether the Fed will hold rates, hike further, or eventually cut, with Fed Chair Powell's upcoming press conference closely watched.
The tech sector is back in correction territory. Easy come, easy go. The implied volatility spread between the Nasdaq and S&P 500 has widened, reflecting outsized demand for Nasdaq-linked hedges. The drawdown spectrum is instructive. When risk-free yields offer the same return as equities, you have to ask what exactly you are being paid to own duration risk in a software company. This one is widening.
When the conflict involving Iran began in late February, it was widely expected to last only a few weeks. It was not. Oil flows through the Strait of Hormuz ran at roughly 2.5 million barrels per day through all of May and the first 9 days of June. WTI oil: $90. US total petroleum stocks fell 13.5 million barrels last week, with overall crude stocks alone dropping 15.2 million barrels. The 12-month forward contract remains near the highs while inventories are falling. The US President claimed that since last month more than 100 million barrels of oil have left the Persian Gulf in a 'secret' US mission to get tankers out via the Strait of Hormuz. The good news, if you can call it that, is at the pump. US retail gasoline averages have fallen nearly 10% since late May, dropping from $4.56 per gallon on May 26 to $4.15 per gallon, the lowest since late April. Gold: $4,094.00. Energy's contribution to CPI has soared since the start of the conflict. One macro analyst posed the question neatly: Why would America ever export oil for dollars it can print?
May's inflation report settles nothing. A soft monthly print buys less when it's drowned out by a hot headline and a 'boomier' demand backdrop; the case for patience now needs a run of cool reports, not one. The Fed chairman will hold a press conference at 2:30 pm after next week's FOMC meeting. According to reporting, the chair never cited any specific measure of trimmed mean beyond referencing a preference for the concept itself. The TIPS curve is so calm, which is another way of saying the TIPS market is clearly betting on mean reversion, which in the past has been the right bet. The market assigns high probability to inflation mean-reverting. That bet has a good track record.
Here is what your portfolio did this session.
S&P 500: 7,266.99, down 1.62% on the day
10-Year Treasury yield: 4.54%, up 1 bp on the day
30-Year Treasury yield: 5.03%, up 1 bp on the day
13-Week T-Bill yield: 3.63%, down 0 bp on the day
Gold: $4,094.00, down 3.90% on the day
Fed funds rate: 3.75, flat 0.00% on the day
Long bonds (TLT): $84.88, down 0.28% on the day