Markets Skeptical of Russian Pullback... Marginal Moves...FOMC MINUTES LOOM
Markets are marginally lower for equities and marginally higher for treasuries. S+P rallied at 4 am to give back 25 quick points by 5.30 am... And are now lower by 10 points... There continues to be skepticism as to whether Russia pulled back or just rearranged the deck chairs ..Nato head is out this morning accusing Russia of still maintaining an attack formation... Here are some headlines courtesy of BB
RUSSIA MILITARY EXERCISES ARE IN PEAK PHASE UNTIL END-FEB, BALLISTIC MISSILE LAUNCHES TO FOLLOW - SENIOR WESTERN INTELLIGENCE OFFICIAL
WESTERN INTELLIGENCE SEES NO CREDIBLE SIGNS OF RUSSIAN DE-ESCALATION - OFFICIAL
This tells us very little about markets... And given that the Bank America survey says Russia rates number 5 on the risk spectrum ,the Fed rates number one, lets discuss the Fed... Today we get the FOMC minutes... They will be heavily scrutinized as to what the magnitude of the next moves will be and how hawkish the Fed will get... Personally, we think markets will be disappointed as the Fed are very good politicians..Yes rate rises are coming, but as Powell used the term "decisions will be made on the data" 15 times in his last presser, we doubt we get much insight ... What we will be looking for is whether a 50 basis move for March is probable and how quickly the Fed will revert to the balance sheet reduction , which would mitigate future rate moves... The WIRP still shows 6.5 rate moves...we still think 4...if the Fed was really as aggressive as the Hawks think, why would they still be buying bonds for another month?..
The Fed...strategists argue that the Fed is behind the curve and needs to catch up... That is their argument for 6-7 hikes... We agree that this Fed is so far behind the curve that it is not funny... They were also behind the curve for most of last year and should have started raising rates last summer...but they did not and are not going to "play catch up"... We have used the adage before that this Fed, and Powell in particular, "are a dove in wolf's clothing".. They will not move quickly...besides Bullard, who has always been an outlier, we see no one embracing 50 or 7 hikes... Most still talk three to four and plan to use balance sheet reduction... Mortgage spreads are much wider on the year and some are calling for outright selling rather than just run off... We think run off, if used to its full extent, will be enough for the Fed for 2022.
Flows.. Pension funds have added to their bond holdings... The curve steepened yesterday to more recent range levels in 2/10 and 5/30 and 10/30... The long Bond has been one of the weaker performers recently, getting behind 2.36 yesterday... Investors believe the Fed will use their balance sheet to control the yield curve, we disagree as we do not think the Fed is that good...but we do believe a slower moving Fed will steepen the curve from current levels... Meanwhile flows and positioning point out to us that shorts are very large in the long futures markets and could cause a surprising near term reversal... But higher rates are likely first... Meanwhile JPM put out a buy signal on the long bond yesterday saying it had held its 2.36-2.39 level of a cluster of support parameters... We said yesterday we were looking for 2.44 which looked like the right level based on the TLT ETF chart.
Inflation...PPI was bad and it looks like both CPI and PPI will be awful for the next month or two...but base effects start to kick in this summer and we still point to Blackrock's analysis that 3% inflation for year end is not out of the cards... We are not advocating the Fed should not raise rates... They have two mandates...employment and inflation...we are just saying the street is too aggressive in what the Fed will do...
Corporate credit staged a nice rebound yesterday with issuance of 11 billion. Order books were 3 times oversubscribed... While we have wider spreads, issuance is still getting done, just more sporadically...we still do not like the charts of where corporate credit spreads are going, but we will put that on the back burner for now...ranges today should hold barring any Russian surprises or FOMC minute disturbances...
