Government Just Can’t Do The Split Screen To The Delight Of Everyone But Equity Investors — What Fixed Income, Currency & Commodity Markets Are Telling Us
Jerome Powell and Janet Yellen demonstrated what policy miscoordination looks like in real-time by providing contradictory signals regarding the State’s willingness to protect depositors. That’s actually a disinflationary signal which ironically can only help the Fed in its fight against inflation. Moreover such miscoordination is easily remedied and the bulls are likely to key off that notion and take this market right back to yesterday’s highs set before Yellen’s testimony was digested. The volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought several positive factors for US stocks. The action in major currencies indicates the $US is weak. The US yield curve is falling and in the current context that is bullish. But there was also one negative factor across global asset classes. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days.
The non-equity financial markets are setting the stage for an equity rally, as commodities give credence to disinflationary impulses, fixed income markets yield lower rates and thus lower opportunity costs to buying riskier assets, and currency markets give a much needed leg up to global growth by pushing down the US dollar. I see these financial fundamentals undoing the incoherence of yesterday’s split screen and powering equities to test resistance in the low 4000s.
Fossil fuels are declining on lower expectations of global growth, while precious metals look set to consolidate recent gains and industrial metals are in danger of further downside. Grains and meats are almost uniformly in downtrends while softs and other ags are consolidating. Commodities are going negative despite the dollar’s recent weakness against the majors. EM currencies are weaker and this partly reflects concerns about the health of China’s economy following the initial surge of optimism on the reopening.
These trends support disinflation in the goods sector, while services are highly dependent on a falling housing market and cautious renters. The data so far are mixed on this score, and suggest the Fed will keep rates higher for longer. But I expect the bulls to cherry pick the news on the credit slowdown and other anecdotal evidence to make the case for a Fed pivot by the Autumn, which is all that’s needed to power a foward-looking market higher.
My current positions include a large cash position, 3M (MMM), Pfizer (PFE), and the levered ETF UPRO.