• Momentum crashes, for now

• Maybe from increasing interest rates…or maybe just because it went up so much

• Hedge funds are still wrong-footed

• Revenues are accelerating and not just Tech

• Consumer sentiment is mixed which is an improvement

• Credit trends are improving

• Retail Sales are still strong

• Quick Hits

• Where did all the crypto money go?

• Chart Crime of the week

• Wrong-footed like Elaine dancing

The tepid -0.2% drop in equities over the last week is not indicative of the crazy moves underneath the surface.  Strangely, not even Volatility looks volatile on the surface.  After a market rally on the heels of the uneventful Trump-Xi summit, momentum stocks crashed.  At one point, a custom basket that tracks the popular momentum longs versus the momentum shorts unwound by over 22% in a matter of days.  People suddenly were questioning the earnings durability of the memory chips and data center infrastructure stocks.  The publicly disclosed SEC filings showed some wavering sentiment in the Big Tech names.  Some offhand comments made by Xi in the aftermath of the summit had people worried about Taiwan and whether Nvidia chips were going to be allowed in China.  Of all the musings, the worry about climbing interest rates rings the most plausible.  With Iran dragging on, inflation worries mounting, and the fragile state of the US debt, rates have been pushing higher.

But the root cause of the volatility is much simpler:  Momentum crashed because it had been performing so incredibly well.  We turned cautious recently because of this.  But earnings and revenues are still accelerating (and tonight’s Nvidia report proves that the AI trade is still alive and well).  Watching hedge fund filings from six weeks ago is a futile mission…especially when people are trading off the whims of a 24-year-old newly minted hedge fund manager (an ex-OpenAI guy is apparently all the rage in the Wall Street Bets crowd).  Taiwan is still a delicate matter.  But it is also a perfect example of the Nash Equilibrium at work (a suboptimal, protectionist equilibrium prevails, but it also results in a stable relationship that does not escalate).  With the mounting inflation worries have come a strong economy.  The latest GDPNow from the Atlanta Fed is screaming +4% growth for Q2!  Professional guessers (economists) expect growth to be below +2%.  The Atlanta Fed nowcast will surely come back to earth, but the early data during the quarter is above anyone’s expectations.  And with respect to the hot CPI and PPI inflation numbers from last week, the professional guessers deep in the weeds say that the data points to lower PCE inflation.  (The Fed has long preferred this measure of inflation.  But new Chairman Warsh might emphasize “trimmed mean” measures which would dampen outlier moves even more.)  We do not expect rate cuts any time soon (the market is pricing a 50% chance of a hike by December).  But as along as inflation remains in check (something the Fed is not sure about now…but their track record on timing inflation moves is downright horrible), strong growth will remain more important than lower interest rates.  And with another extension of the ceasefire in Iran and perhaps some ships transiting the Strait of Hormuz, inflation might not be a runaway problem.