Thursday Macros
Rampant Fear Dominating Markets... Inflation...Risk Off... Global Rates Up
We continue to see fear dominating the risk space as the inflation numbers, whether transitory or not, have caused significant pain... Global stocks hit a 6 week low and the MSCI World Index sank for 4th day.... US equity futures are making a run from their lows of the overnight session and are now up for the Nasdaq.... Funny how a 4 standard deviation surprise versus consensus in core CPI can catch the market off guard... We have said all along that while the Fed may be eventually correct, the degree and magnitude of the numbers are very concerning...and the 900+ PHDs in the Fed, none of which we assume ever traded on a desk, do not understand and are under appreciating the psychological impact of the massively high inflation numbers.
Rates... Treasuries got crushed yesterday, but we want to talk Global first... We clearly pointed out this week that 10 year Bunds had reached the -.16-.17 level which was a third time down... Third time down is when these chart levels tend to break... They did break yesterday and 10 year Bunds are now at -.11, on the way to positive territory... Yesterday in treasuries we saw break evens in the short end go parabolic... At one point 2 years and 5 years were 11 wider, and 3 years 20 wider, before stabilizing at higher levels... This morning we see 10 year break evens at 2.55... But today is the 30 year auction... Here the break-evens are more manageable as the inflation aspect is viewed as more transitory... Boy do we hate that word...for today support for the 10 year is now back to 1.75-1.77... If it stabilizes and rallies then 1.62-4 is resistance... We expect that the massive moves in inflation will continue and 10 years move to the next level of 2%... This is time sensitive because as time wears on rates could stabilize to a range...
Fed and numbers... Whisper today for claims is closer to 450... But PPI YOY is expected to be 5.8%... Hard to justify current treasury levels with this type of expectation... But the real fireworks will be tomorrow's retail sales numbers, which at 1% expectation, could come in significantly higher (our view) or lower. That will cap a volatile, choppy week, for treasuries and global rates, where we still lean to higher numbers... The Fed needs to change their mantra... Clarida looked very surprised yesterday in his interview on inflation.. The Fed needs to change their verbiage to be more forceful of the changing numbers... They continue to get bad advice from their staff... Three Fed governors speak today.
Equities... Too much leverage, too high of global margin debt, and too much apathy that the Fed is "all in" and will be the put to bank on... We said that 2021 will be a different Fed, so do not expect the Fed to step in unless a full tantrum crisis develops.. No more buying of corporate paper, no buying of equity ETF, and no lowering of rates... Equity markets will stabilize not to far from here.. For Nasdaq, 200 day moving average of 12,451 should hold, but that is still 500 points lower... And that is not a given, as we had a 26% move in Vix yesterday close to close, and at one point it was about 40%.
Druckenmiller... We were asked a few times yesterday about our thoughts on what Stan Druckenmiller has been saying... On two fronts we could not agree more... The Fed is doing what it did in the crisis of a year ago today... That is not the right strategy... There is no reason for the Fed to be buying mortgages at all...and probably not treasuries either... They are clearly monetizing the debt, which is not their role... We also agree that the current fiscal stimulus is absurd, too slow, and not focused on current problems...look at today's bottleneck in Memphis on the Mississippi where 200+ barges are being held up because of repairs to a bridge... And the deficit is way too large, regardless of the MMT strategy... Where we disagree with Druckenmiller and for that matter Bill Dudley, is that we don't see 10 years or short rates going to 4% + anytime soon... We expect 10 years to hit 2% and maybe go a bit higher, but stabilize in a 1.75-2.25 range... We also disagree with him on the dollar as a reserve currency... What he said yesterday was that the dollar would no longer be the world's reserve currency within 15 years... What we have asked for years, what currency is better suited to be the reserve currency?.. The Euro? Give me a break, a currency where 27 countries never make a decision?... We are not sure the Euro will be around in 15 years... The Yuan??? Given their lack of transparency and lack of liquidity, along with paranoia, not likely... The Yen? No...so we remain with the old adage we have used... The dollar may be a dirty shirt currency, but it is the least dirty shirt in the current laundry... And for digital currencies??? Forget it for now.
