Accelerating Disinflation Without A Global Recession Is A Christmas Fairy Tale The Bulls Cling To As the Days Grow Colder — What Fixed Income, Currency & Commodity Markets Are Telling Us
The bulls rely on an unholy mix of select market data and vain hope to justify their belief in a Fed pivot later this year. Cherry-picking market data to support this view is easy because of the trends in commodities and in goods, but precarious when factoring in services and labor market data. The data points this week tend to the bearish side and likely drive choppy trading through this earnings season. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days.
Commodities have been trending higher on the double punch of a weaker $US and the reopening in China, yet most show signs of slowing down if not declining from here. Fossil fuels are either declining or have significant downside risk, precious and some industrial metals are topping out if not in downtrends already, while ags, meats and softs are mixed but mostly consolidating. These divergences mean the impact on inflation is minimal and that supports the bullish hypothesis that disinflation will accelerate as the year progresses. Equity and fixed income derivatives mirror this perspective as both the VIX and the MOVE index are testing near-term lows as treasury yields fall.
The problem with this perspective is the Fed is keyed off services prices more than goods, and commodities play a minor role in the setting of services prices. Wages are much more important and today’s outrageously positive jobless claims report simply entrenches the Fed’s view that interest rates must stay higher for longer.
Yesterday I exited a small part of position short position in the markets via the inverse levered ETF SPXU. Consequently my current positions include a larger cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETF SPXU, all of which nets out to a large short position in equities.