Monday Macros
Wednesday Key Day...Fed Meeting and Biden Cap Gains Double...10 Yr 1.60
Wednesday is the day... We get the results of the FOMC meeting in the afternoon and then get the Biden State of the Union massive capital gains increase in the evening... This should start the new trend in rates and potentially in equities... Will the reflation trade start in earnest again, after the one month hiatus, where 10 years went from 1.75 to 1.55, or will we get another run at 1.50 10 years to try and break lower in rates?... Meanwhile we get the old liberal "soak the rich" move Wednesday night... Biden has already let Bloomberg know that he is going for the biggest capital gains for the wealthy. It won't work... Do you really think the wealthiest of the country, those making 1-5 mm a year will stand still as the government comes after them?... After all only 23% of the equity or capital gains are in taxable accounts?... We think a compromise will be made somewhere in the 28-30% range...we will see... Meanwhile many point out that capital gains historically do not lead to lower equity prices... We think the jury is out on that one, but the dislocation from the Faang and Bitcoin, where massive capital gains lie, will be disrupted...
Fed and inflation... The Fed did a good job coming out of the April meeting convincing the bond crowd that inflation will be transitory,,, so far we have had one great month of numbers, but shorts in treasuries covered and we got back 20-25 basis of 10 year yields increases, from 1.77 to 1.51,,, but could not break that number . The question one has to ask is whether one believes inflation is transitory or not...Powell and Clarida believe it is, Kaplan, based on his speeches ,does not... We do not... Great economic numbers are just starting... Huge increases in the average price of homes, cost of homes, lumber, supply chain time frames, copper and even wage gains are just starting... We think inflation will reach the 3% and higher level, which should start to concern the Fed at the June meeting...tapering is coming, especially in the mortgage space, where the Fed roll offs and buybacks are overwhelming the markets. As for Labor markets, the Atlanta Fed median wage growth was up 3.4% in February, while this months beige book showed shortages of drivers, , low wage and skilled workers . Multiple stories of the difficulty of getting workers everywhere. The Fed won't change policy at this meeting but with the economy reopening, jobs returning , activity booming and inflation climbing, it is only a matter of time before tapering gets seriously discussed.
Rates... Fed meetings are focal points for trend changes... We see it no differently Wednesday, even with the Biden attack on capital gains... What we do not know is whether the reflation trade is starting back this week or may wait until the approach of the June meeting 10 years have minor support at 1.62, then bigger support at 1.68... 1.75 and then 1.875, on the way to 2%... It will happen this quarter but still not certain enough to say it will start again in earnest this week... Key levels for 5 years are .85 and .92, on the way to 1%... .78 going the other way to .65... Long bonds 2.21 is key to break, 2.29 and 2.41 on the way to 2.625,,, 2.125 the other way... Still think higher rates
High Yield and Spacs correlation... High yield spreads continue to set record tights and record low yields... We think that is about to change... Many continue to prefer going down in credit to pick up yield rather than duration... We tend to agree... But the Spac trade, raising equity for low rated junk companies, has lead the surge in the tightening of HY as companies use the cheap Spac equity to buy back the expensive HY bonds... The Spac era is slowing, maybe even the beginning of the end... Spac issuance this year is a pittance of last year and even show further signs of slowing... With this back stop decreasing it is only a matter of time before we see widening of credit spreads... Not today, but it is coming.
Equities... No strong opinion based on Capital Gains changes , but flows are starting to show some weakness... Cash levels of big money manager are down to 4% according to BofA,, and bulls are up to 67% according to the cover of this weeks Barron's... Where there is still lots of cash looking for entry points is in Private equity, where we see 1.6 trillion needed to put to work....