Monday Macros
Rates Back Up on Yellen Comments and Renewed Wage Inflation
Janet Yellen made comments that higher rates in treasuries would be welcome... In fact she said rates should normalize, especially given the forthcoming massive infrastructure bills... 10 years have backed up to what was previously resistance of 1.58, after breaking to 1.55 on the weaker employment number... 5 years are clearly above the .78, at .80... So we are back in the range with lots of longs in the market in front of the 120 billion dollar refunding this week of 3/10/30. So what is "normal" anyway... For old timers the historical average of 10 years is 4%... Yellen is not talking about going back to those levels... Currently we think the world normal refers to zero real rates, or about 2.42... So we look at normal as probably 2.25-2.50... And given the difficulty of not be able to break 1.77% for 10 years, we would be happy to see our original prediction of 2% 10 years and 1.25% 5 years... Either way rates are higher yielding today.
Fed unwind... The NY Fed starts to unwind their Bond ETFs, starting today... They own a lot of them... The biggest holding is LQD... But there are many others where the Fed holds over 2 billion... Do not expect the Fed to sell quickly and will hopefully do what they did with their Bear Stearns holdings, wait for the big guys to call them to show them billion dollar bids, when the market can stomach it best... Doubt they will be the offer in the ETF space... As for tapering, the employment number knocked it off from the top of the Fed discussions from next weeks meeting, but it will get some play... Many Fed governors are thinking that the labor market is much tighter than the numbers look... And many are working under the table and not showing up in the employment numbers...Certainly the Dallas Fed paper, endorsed by the St Louis Fed, has credibility... Even Clarida, in an interview with Zenter of MS, said that 500 a month of employment, and a recent 3 month average of 541,000, is enough for the Fed to start the talks about tapering...... The actual tapering may not start until near end or even into next year, but the discussions will start next week.
Inflation... It is here and brewing...CPI on Thursday current expectations for
CPI YOY is 4.7%, after being 4.2% last month... Car prices may have peaked for now, but given what we read over the weekend, we doubt it... Car prices are up $4000 over the last year, but companies are using the shortage of chips to put the good stuff in the High End vehicles....nonetheless it is wage inflation that is never transitory, that will sink the disinflation crowd... Higher rates. With volatility at some of the lowest points, expect a spike as the inflation mantra starts to change and become a fear, as opposed to the non believers out there... The next big move in inflation will come from rents, where landlords will start to raise rents based on shortages and increasing home values....
Goldilocks is not the right strategy... We are still ok with equities for the rest of the month... But inflation and higher rates are coming... And so is a massive amount of stimulus... But it could still be towards September when fireworks occur... But take some risk off the table... Too many are pursuing similar strategies...
The chop will continue this week.. The inflation and rate war will continue... Do not get mesmerized into what many are trying to convince you that this is a "Goldilocks economy"... It is not... And we view it as treacherous... Range for 10 years is 1.52 to 1.64... But if 5 years can not break the .78 and sustain it, higher rates are coming.