Tuesday Macros
The CEO of Moderna was interviewed by the FT, where he said he fears the current vaccines efficacy of the new variant will struggle with all of Omicrons mutations and new shots may take months to develop... So much for the comments out of South Africa that the current cases are mild... Once these headlines hit the 10 year went from a 1.52 yield in Asia to 1.41+... The 5 year went to 1.068... Both have backed off to 1.44 and 1.11 , respectively... But the uncertainty of the new variant has sent global equities into a risk off mode... We would like to talk about the soaring inflation numbers out of Europe today, but that is not what the market is focusing on as we trade on the last day of a particularly volatile November.
Powell, the Fed and rates... Powell speaks today, as does Williams and the retiring Clarida... What can they really say?... No one knows what the variant will bring... But so far, and Biden reiterated this yesterday, there will be no lockdowns... For now...Powell , along with Yellen, will be in front of the Senate at 10 am... Powell will get drilled on the new variant and the Fed's response... It is a crime that the Fed is not further along in tapering and raising rates... They have potentially missed another window... And while they have other means if the variant becomes a problem, they have only built 15 days of tapering, a pittance for where they need to be... Powell will backpedal on increasing tapering at the December 15 meeting unless we get more certainty... Interest increases continue to be built out of the markets for 2022... We still think the Fed raises rates, but our view on the variant and the current US economy is more positive than others think...One of our traders called us last night to tell us that Morgan Stanley has gone back to their position of no rate hikes in 2022...
Rates... 10 year has resistance at 1.42/1.43.... Which held in this morning..1.37 after that.... 5 year, after achieving our 1.31 objective last week,, has resistance at 1.03... And .92 after that if it gets real bad... As long as we have the current uncertainty, we expect the yield curve to steepen as the short end continues to build out future Fed increases...Once this passes the curve should go back to a flattening mode...5/30, where we had reached low 60's against our .56 chart point expectation, is now back to 71/72... It will reverse, but not before we know more...even a very strong employment print Friday will not deter the uncertainty from the new variant for now...
Inflation and supply chains...European aggregate CPI came out this morning at 4.9% YOY, 10% higher than the expectation of 4.5%... How anyone can say that inflation is transitory and will go away by itself, is absurd... And if you think the supply chain issues will resolve themselves, something that David Rosenberg was saying on CNBC yesterday, we could not disagree more... And while the President was optimistic on supply chains, look at the verbiage from the online massive sale yesterday, well below where Adobe was expecting... One of the reasons for the lower sales numbers was that companies could not get the goods needed...
Equities only heard yesterday that there were not going to be shutdowns... They rallied taking out the Nasdaq losses from Friday and a good chunk of the S+P losses... But Bonds were telling a different story... Even IG corporates is being affected, while issuance saw 6 companies issue yesterday, 6 other companies deferred because of the wider spreads and volatility... Not a good sign for risk going into the last month of the year... That did not stop JPM's equity team from coming out with a bullish 2022 equity forecast for the S+P of 5050...
Divergence in S+P futures and open interest doesn't portend well for stocks. We think stocks will move lower in December, at least until the uncertainty for the new variant fades... Options skew shows traders are paying more for downside protection... We are no longer a fully invested bear...but we do not see an equity correction in the near term... Yellen and Powell are in tough spots... Yellen needs to get the debt limit raised... And that is one where the treasury can not "kick the can " down the road... Clearly the stimulus bill continues to plague the administration and we doubt it gets passed this year... Powell needs to find a way to take accommodation off the table in what is now a more uncertain world... Inflation is real and will continue to get ingrained in the psyche of investors...
