Monday Macros
Bonds Reversing...Clara. Powell Speak Shortly...Equities Biding Time
A colleague led his weekend thoughts that " no one outside the bond market understands the bond market"... We understand what he was getting at... Last week we saw a reversal of bonds and massive short covering in an illiquid environment... Hedge funds and CTA's had to reverse course from hawkish trades as the Fed ,BOE, RBA, and others seem to reverse their hawkish views concerning tightening... Powell was his typical self, refusing to discuss rate increases in 2022 and focus only on tapering... That was taken as dovish. Others added that the employment numbers showed some light at the end of the tunnel of supply chain issues, it did not.. Nonetheless, the big read was missed by those outside the bond market... Fixed income rallied because the shorts were caught off sides... It had little to do with the employment number, which we thought was a pretty good number for the economy, and even if supply chains were loosening up, it would only lead to stronger economic numbers... Demand exceeds supply by margins we have never seen...
Treasuries, yield curve and major moves last week and what we can expect this week... The "Swoosh Movement" happened Friday when the 10 year broke the 1.51 level and rapidly moved to our main resistance of 1.43... It happened quickly as the CTA tracker used by our colleagues, " the incumbent 'max short" in TYs showed a "cover short" trigger kick in "and caused the 7 basis quick move in 10 years. It had nothing to do with fundamentals.. And only about technicals... Again, big moves happen around Fed meetings and the November one was a big one, coupled with an employment report... Question now where are we going next... Overnight treasuries have backed off from the low yield... 5 years hit our resistance of 1.04... We think this exhaustion move is over for now and the focus will be supply this week..REMEMBER THE BOND MARKET IS CLOSED THURSDAY FOR VETERANS DAY, STOCKS WILL TRADE NORMALLY. 5 years should move back to 1 and 10 years to 1.52
Fed... 5 speakers today including Powell and Clarida... 4 tomorrow with Powell the lead again...we do not expect anything different then last week...both appearances are at a diversity conference... But we assume there will be some headlines... As for Tapering goes, we think the Fed will taper 15 billion a month for the next 8 months...HOWEVER, Citi came out over the weekend with a view that says that the Fed will announce an increase in tapering at the December meeting to accelerate tapering to 50% higher, to 22.5 billion a month with 15 billion treasuries and 7.5 billion mortgages...at this point we agree that it could happen, but we do not think the Fed wants to rock the boat, given they will have to adjust policy to the absurdly high inflation numbers that are not going away anytime soon.
Summers... Wall Street Week... We try to watch this segment produced late Friday every week...Given he is an independent thinker, which sometimes get him in trouble, he does give an honest read... His points this week is that the Fed is falling further behind the curve... Demand massively is exceeding supply... And like us, he does not see supply chains getting better... And inflation continues to plague the Fed and is not being addressed... He broke down the employment number with an interesting point... Most of the increase in workers added were lower paying hospitality and leisure jobs, yet the average wages and income remained high... He attributes this to the large increases in wages that other jobs are garnering... So the wage inflation component continues to rise significantly... His big point is that if the Fed does not address inflation now, there is limited opportunity for a "soft landing"...
Equities...GS reaffirmed their 2022 target of 4900 for the S+P... But Barron's had an interesting headline... " How to Play a Market Bubble"... It is coming... We still remain a fully invested bear... But many make the case that the equity market is good until year end... We do not dispute that.... Covid is over... More Stimulus and Infrastructure spending has been passed and will be implemented...Real rates are absurdly low... And another bill of 2 Trillion remains to be discussed... It does not look like taxes are rising for now, but the jury is still out... As Barron's put out, the S+P 500 trades at a 21.6 multiple against 12 month forward earnings, but nearly 33 times if price earnings are weighted by market cap... Seems steamy... We now think we see a correction in January as everyone wants to book capital gains in 2022... Just a thought.