Just today, as US inflation came in a touch hotter than expected, the Chinese Yuan is pulling lower, testing the lows of May 9, 2022.
Today the Federal Open Market Committee raised the fed funds rate (upper bound) to 1% from 50bps.
The clear and present danger to the global economy is inflation because global central banks are starting to take aggressive actions to deal with what they now believe to be non-transitory inflation.
The Fed is tightening into a growth slowdown
For a confluence of reasons ranging from COVID to property sector problems, China has been experiencing slower growth. Many cross-asset relationships suggest that a devaluation in China could help spur growth.
In a year when the US is experiencing massive fiscal austerity, monetary tightening, war, inflation and a pandemic, there are many drags to stock performance.
The Federal Reserve has all but cemented expectations for a 25bps rate hike next week. But, events have changed a lot in the last couple weeks that raise a faint hint that the Fed may not hike, despite elevated, persistent inflation.
2022 has been a tough year so far for risk management.
After President Biden’s speech, the consensus seemed to coalesce around the idea that the sanctions put forth were not as strong as they possibly could have been.
Of course, the backdrop right now is Russia—a large petroleum-producing country—threatening to invade Ukraine.
Tomorrow we get the consumer price index year-over-year for January, with expectations for 7.25%.
Since May 2020, the Chinese Yuan has defied the path of other emerging market currencies, strengthening by almost 12%.
This quarter’s strategy report, Forward Thinking 2022.
This Friday we’ll see where the US CPI comes out. We recently got the November print for the Eurozone CPI, and it came in hot, hitting 4.9% year over year.
For years preceding the COVID-19 pandemic, call option volume averaged about 15% of daily NYSE volume. This was a normal level of speculation that investors were used to.
A prominent feature of the post-Great Financial Crisis period has been the persistent decline in velocity, which is why the Fed has had to pump so much money into the system for so long. Absent an increase in the money supply, the drop in the velocity, all else equal, would have likely been the backdrop for a long recession.
We find compelling evidence that seasonal factors exist, historically leading November and December to be the highest 2-month combined returns all year. In our allocation portfolios, we have increased our equity exposure significantly in an effort to capitalize on these year-end trends.
Fed funds futures for 2022 and 2023 have broken out to new highs, likely on the back of rising inflation expectations. As things stand now, the market is looking for three hikes by the end of 2023, with the effective fed funds moving from 8bps today to 85bps.
Mid-Quarter Update: what does transitory mean?
Just when everyone thought we had COVID-19 whipped, the delta variant came along and US cases inflected higher.
This is our Q1 2021 slide presentation of our quarterly strategy report.
In this Q4 2020 slide presentation of our quarterly strategy report, we discuss: Bob Farrell’s Rules for Trading (#5 and #7 especially resonate with us right now). What the retail trading frenzy, recent IPOs and speculation can tell us...
In this presentation, we outline our argument for gold entering a new structural bull market.
We believe the risks of an intermediate decline are higher than average and would advocate a more cautious stance toward equities right now.
As funding strains appeared in March, the USD surged. Then the Fed stepped in with massive foreign exchange swaps as a way to lend USD to foreign central banks, intended to ultimately be lent to borrowers in need of USD.
Since the March 23, 2020 low, when the Federal Reserve announced basically unlimited liquidity via a variety of programs, corporate spreads have narrowed, and the stock market has risen substantially. In the chart below, I overlay US investment grade spreads over the S&P 500 Index.
While not 100% correlated, there tends to be a pretty good relationship between movements in the S&P 500 and credit spreads, both investment grade (IG) and high-yield (HY).
Despite the relief rally yesterday, financial conditions have tightened significantly in the last couple of weeks. This likely explains why the Fed just made an emergency 50bps cut to the fed funds rate.
Fed funds futures are on the move today, with longer dated futures now pricing in now two 25bps rate cuts by the end of the year. However, the market does not seem to be pricing in, yet, any material chance that the Fed cuts at its March meeting.
This morning the monthly job openings and labor turnover (JOLTS) report was released, and it came in significantly shy of expectations. While Bloomberg’s consensus estimate was for 6.925 million job openings, the actual number came in at 6.423. It is important to keep in mind that this is December data, so it doesn’t yet reflect the impact of the coronavirus on business operations.
Sell-offs can start for any number of endogenous or exogenous events. A mentor used to tell me, “There are a million reasons to sell a stock, but one reason to buy.” What he meant was that there are always personal reasons to sell...
10-Year US Treasury yields are down about 30bps so far this year, continuing the trend of lower rates that began in the fall of 2018 and confounding investor expectations for rising rates which would validate a turn up in economic activity.
US corporate profits are down from the 2014 peak. In this mid-quarter special report, we dive deep into corporate profits, taxes, profit margins and the increasing government debt levels that have propelled stock and bond prices higher, in our view, leading to rising equity and government bond valuations.
As hopes for a trade deal fade, similar to May and August, the CNY is devaluating against the USD again. In our work there are a handful of fairly mechanical relationships that should follow if the CNY continues to devalue.
In our mid-quarter update, we highlighted the plunge in the University of Michigan’s consumer confidence indicator, suggesting that “good feelings” among consumers were starting to fade. Often surveys offer a leading glimpse into economic activity. A more confident consumer is more likely to make those big-ticket purchases, like homes and cars, as well as consuming more services.
In this mid-quarter special report, we do a deep dive into the University of Michigan survey and discern what it may mean for the vigor of the consumer moving forward, prospects for a recession and consequences for asset allocation.
Germany’s second largest bank, Commerzbank, reported a fourth straight quarter of falling revenue and projected lower profit for the year, suggesting clients have been impacted by trade tensions.
On January 3, 2019, Chinese stocks made a v-shaped bottom and surged into a peak on April 19, 2019. Since then, stocks have corrected by about 7%, dropping, recouping about 6% of the peak to trough decline that ended on June 6, 2019.
Yesterday BASF, the largest chemical company in the world, announced its earnings would fall well short of analyst estimates in the second quarter. Earnings season in the US begins in a few weeks. So, we ran through our charts to harvest any insights about how corporate earnings may play out.
So far this week, we’ve received a few data points that reinforce the manufacturing slowdown taking place in the US. Below is a calendar of events for the last couple days.
The IMF made news yesterday by announcing its latest updates to 2019 GDP growth around the world. It guided global growth down and made an especially large cut to Eurozone growth estimates, bringing them down 30bps since January to 1.3%.
Yesterday’s stocks reacted to a raft of overnight foreign economic data that it perceived positively. In this note, I’ll run down the data and my doubts about that reaction. The hits began with China’s Markit manufacturing PMI jumping to 50.5.
Credit markets often move before the equity markets, and this can offer helpful information about the near-term path of equity prices. In general, I like to see credit confirming what the equity markets seem to be saying. When credit stalls, like it is now, I take notice.
Knightian uncertainty is named after University of Chicago economist Frank Knight (1885–1972), who distinguished risk and uncertainty in his work Risk, Uncertainty, and Profit. The concept of a separation between risk and uncertainty is an important one right now given how severely politics are driving markets.
The slide in oil prices in October accounted for most of the move in 10-Year US Treasury bonds via the inflation risk component of the term premium. The two series are always highly correlated and this is a mechanism through which oil price changes are incorporated into US Treasury pricing.
The S&P 500 experienced a waterfall decline in December, something rarely seen. Measuring the decline using a 30-day Wilder Relative Strength Index, it is clear the extremes recently experienced.
Oil prices have swung drastically over the last couple months. The market was unprepared for the US to grant waivers amounting to nearly one million barrels/day to fill the void expected to be left by the drop in Iranian exports. Instead of Iranian exports plunging to almost zero by November...
Energy is the best performing sector in four of six market-regions. (From two market groups, Developed and Emerging, and three regions, Americas, EMEA, Asia, we get six market-regions.) Among Developed Market sectors, energy is 5th YTD, down about 5% less than the MSCI All Country World Index.
Overnight, new data released in China suggests businesses are having a tough time lately. Cheung Kong University produces an alternate PMI Business Conditions Index in association with the China Federation of Logistics and Purchasing. The latest data point plunged more than 10 points from its end of July reading and is currently sitting at 41.88, deep into contraction territory.
The Chinese stock market is closed this week for the Golden Week holiday. On this side of the Pacific the markets have been busy this week with US Treasury bond yields breaking out and stocks selling off—especially technology—based on the revelation that China implanted devices in technology products shipped to the US.
