Outlook: It’s a huge week for data releases, starting with US durables today but also German inflation, eurozone harmonized inflation and the US PCE price indices. China delivers both PMIs this week, Japan reports the Tankan and we get the US ISM report. Consumer sentiment is sprinkled around the week. Thursday is such a big release day the Econoday calendar will barely fit on the page and still be readable.

As for the US stock indices felling frisky because the threat of recession is expected to tame the raging Fed, the CME FedWatch tool does not back up that story, at least not near-term. As of this morning, 92.7% of traders expect the full Monty, i.e., 75 bp. Only 7.3% expect the Fed to back down to 50 bp. T

o be fair, expectations baked into the farther-out FOMC’s have indeed lessened a bit. A week ago, 46% expected to see 3.50-3.75% by December. That has now fallen to 41%. A month ago, it was zero. Folks who follow this say that drop demonstrates the expectation of a newly wavering Fed. We are inclined to say it’s normal variability and besides, Fed funds futures are, historically, a lousy indicator of actual later Fed actions.

One of the great mysteries of life is how on earth the stock market can have sentiment so far divorced from reality, meaning real conditions like earnings and the economic outlook. Remember the Tech Wreck, preceded by complaints about high valuations for companies with no earnings and sometimes no products? We were and still are in thrall to some of that sentiment. But not at the pro level. To bring us down to earth, BoA/ML reports the BoA Bull and Bear indicator remains at extreme bearishness at zero.

Moreover, in the latest week, $10.8 billion went to cash from stocks ($16.8 billion) and bonds ($23.5 billion). We’re not sure where the rest went if not to cash or gold ($600 million) Year-to-date, investors sold $913 billion in bonds and bought $195 billion in stocks. Any capitulation was in bonds, not stocks. There is an implication that the worst is yet to come in equities if they haven’t got the message yet.

A Bloomberg summary gets it right, we think: “Money managers betting on a sustained global rebound will be left sorely disappointed in the second half of this crushing year as a protracted bear market looms, even if inflation cools.

“The good news: After the historic plunge, stocks and bonds aren’t far from bottoming out. That’s the key message in the latest MLIV Pulse survey. The more than 1,700 respondents harbor plenty of fear that the Federal Reserve will end up triggering an economic downturn by ramping up interest rates to tame price pressures that remain largely supply-side driven.

“Yet survey contributors are less bearish on the market outlook than the professional class of doom mongers -- projecting much of the pain is already priced in. The S&P 500 Index is seen closing 2022 at 3,700, while the 10-year Treasury yield is seen edging up to 3.5%.”

Well, maybe. We need to see September first. The S&P can easily get to 3200. Before then, Morgan Stanley offers this idea–that momentum can deliver another 5-7% before reality kicks in.

FX market sentiment is influenced by what’s happening in equities and if we are in for an irrational burst of upward, energy in equities, presumably that means a loss of interest in the safe-haven dollar. It’s irrational for the euro to rise in the face of an energy crisis, not to mention inflation, but never mind. One thing at a time.

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