Subscribe to receive this FREE daily commentary directly in your email
It will be an important week, with finalized third-quarter productivity data on Tuesday, the CPI on Wednesday, the PPI on Thursday, and Import/Export prices on Friday. The CPI is expected to show a 0.3% m/m increase, up from 0.2% last month, while core CPI is also projected to rise by 0.3% m/m. Headline CPI is anticipated to climb to 2.7% y/y, up from 2.6%, while core CPI is expected to rise by 3.3% y/y, in line with last month. PPI numbers are also forecasted to increase in November to 0.3% m/m from 0.2% and to 2.6% y/y from 2.4%.
The CPI on a m/m basis has been steadily rising since it bottomed in June. If the CPI Swap market is correct and the figure comes in at 0.27%, it would mark the highest CPI increase since April. The concern is that December is currently pricing in a 0.4% m/m rise. The Fed believes inflation is back to 2%, so the outcome remains uncertain.
In the meantime, market strains appear to be persisting, as noted last week. The spread between the December and January contracts of the S&P 500 Total Return Index Futures is around 57.5, with those spreads turning negative for the March contracts. This suggests that, at present, there is a high cost associated with contracts expiring in January, but this cost declines rapidly for March.
This may indicate a rising funding cost and that the market is beginning to experience some form of strain. If these pressures persist or worsen, it could trigger a deleveraging event as costs become unsustainably high.
It is not unusual to see this type of bump in costs around the turn of the new year, as this has been the case over the past three years. However, this year’s costs are nearly double what they have been in previous years, making this an especially interesting scenario.
There is undoubtedly less liquidity in the market compared to past years, with the reverse repo facility now at just $130 billion, down from a peak of $2.5 trillion. Additionally, primary dealer repo activity has surged recently, indicating an increase in equity-backed repo agreements, where equities are used as collateral to raise cash. This could be a sign of growing liquidity strain.
This comes at a time when 10- and 20-day realized volatility has plummeted and seems to be approaching a bottom, at least for now. This suggests that realized volatility likely has only one direction to move next—upward.
Additionally, the 1-month implied correlation index has dropped below 10, a historically rare condition. Levels this low have only been observed in late 2017, preceding the January 2018 decline, and in July 2024, preceding the August 2024 decline.
This is further amplified by the fact that, based on metrics such as price-to-book, price-to-earnings, price-to-sales, and dividend yield, this is likely one of the most expensive markets of the modern era.
Valuation alone cannot pinpoint a market top, but when combined with other factors, it can strongly suggest that a climactic event may be approaching.
-Mike
Subscribe to receive this FREE daily commentary directly in your email
Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
Bond Yields Are Nearing Escape Velocity
Mott Capital's Market Chronicles 9 hours ago