Market 09/28: Big tech rally, SPX successfully defends 4300

Big tech creates momentum for shorts-cover rally pulling SPX above 4300

After attempting a rally in the late afternoon yesterday with put holders starting to exit positions at noon when SPX touched 4240.

Optimism about inflows combined with the overly extreme positioning of put buyers fuels a strong shorts-cover rally this morning with most call volume concentrated in mega cap tech.

Investors are not only optimistic in the stock market but also in the bond market with heavy call buying into TLT throughout the morning, signaling confidence in a policy deal this week and a temporary retreat in bond yields.

It seems JPM has temporarily succeeded in defending its Q3 collar trade level at 4300. Volatility has also cooled significantly today.

Congress remains divided, aiming for a temporary agreement

Democrats' temporary plan will be rejected in the House, controlled by Republicans, due to including $6 billion for Ukraine
House Republican Leader Kevin McCarthy has not spoken with Biden
House Republicans are trying to pass the 4th temporary spending package today

Yields show no signs of stopping their rise, pressuring public debt servicing capacity

US 10-year Treasury yields continue to rise to 4.70%, the highest since October 2007 before easing slightly late morning.

US spending is currently 44% of GDP annually and the spending deficit has reached 6% of GDP. Since the debt ceiling crisis, the US has borrowed ~14 billion USD per day to cover deficit spending.

US debt costs have hit 3% and will rise to 5% as interest rates surge. 5% of 33 trillion dollars is ~1.7 trillion dollars in interest payments per year. As the government issues trillions more in bonds to cover spending deficits, interest costs could account for up to 20% of government revenue.

Despite government spending being in a tough spot, Fed still calls for “soft landing”. People have searched for the keyword "Soft Landing" more than the 2008 peak.

Q2 GDP revised report shows weaker than expected economic backdrop

Q2 GDP data finalized at 2.1% as in the previous report.

However, real consumer spending fell to 0.8% from 1.7% in the previous report, and down 80% from 3.8% in Q1 - the lowest since Q2 2020.

Not only consumer spending but also estimates of household savings were significantly revised downward.

Overall, the final Q2 GDP revision is more negative for the economy but becomes motivation for the FED to stop rate hikes for the last time this year. Today's revision clearly shows the pressure of inflation on the consumer market, which is the backbone of the US economy.

August pending home sales hit record low

August pending home sales fell 7.1%, equivalent to an 18.8% decline year-over-year.

This is the largest monthly decline since September 2022 and pushes the overall index to lows like during the COVID lockdown.

With current high interest rates, pending home sales seem unlikely to recover soon. 30-year mortgage rates have risen to 7.83%, the highest since October 2000.

Initial jobless claims drop to 12-month low

Initial jobless claims for the past week at 204 thousand, seasonally unadjusted at 175 thousand - the lowest since September 2022.

Continuing claims remain below 1.7 million.

Although initial jobless claims remain low, consumer confidence surveys show the labor market deteriorating significantly and financial conditions tightening sharply.

Oil prices continue heading towards $100/barrel

Russian Energy Minister Nikolai Shulginov said:

Fuel export ban will be extended until the domestic market stabilizes
Additional measures may be implemented to address the fuel shortage.

Crude oil prices rise to 94 USD and are currently trading at the highest level since August 2022.

Current price is 35% higher than the level the US wants to add to the Strategic Petroleum Reserve, although US SPR inventories remain at the lowest level since 1983.

Other news:

Russia's third-largest oil producer, Gazprom Neft, announces it will no longer accept US dollar payments. Recently, other BRICS members like India and UAE have priced oil in rupees instead of US dollars.
Evergrande shares halted trading on the Hong Kong stock exchange after news that the company chairman is under police supervision.
Gold price falls to 6-month low