Who’s ready for another week like last week?!
Yeah, that’s what I figured. Crickets.
Everyone will of course be laser-focused on the bond market for signs that the selloff has room to run and based on recent history, it just might.
Last week was a balanced portfolio’s worst nightmare. Among the 35 60/40 funds with at least $1 billion in assets that Bloomberg tracks, all suffered losses during the week with an average decline of more than 1%. This is what happens when your diversification strategy stops working:
But in case you didn’t have enough to worry about after last week, you’ll get to stare down another government shutdown. “The House plans to vote on Tuesday on legislation to keep federal agencies operating beyond Feb. 8, when existing funds expire,” a senior House Republican aide quoted by Reuters said on Friday. “The aide did not provide details, however, on the duration of this latest-in-a-series of temporary funding measures,” Reuters goes on to (dryly) note. So we’ll get to relive this drama all over again just weeks after the fleeting January shutdown and you can expect plenty of blame-casting and presidential Twitter tirades (and yes, the idea of Twitter tirades being “presidential” is entirely absurd).
“Congress is likely to continue its can-kicking exercise, as a bipartisan agreement on immigration reform that would clear the path for a new budget bill seems unlikely in the very near term,” Barclays writes on Sunday, adding that “the effort of the administration to fence off the Russia investigation is likely to continue to increase tensions with the FBI and the Department of Justice [and] the increased political uncertainty could bring more upside to US yields, adding to the global sell-off in rates and weighing on equity markets.”
Also on Thursday, we’ll get the BoE. They’ll stay on hold, but this is an inflation report month. Recent pound strength should help in terms of giving them some rope. Here’s the situation:
And here’s Goldman:
First, core inflation will likely fall sharply (though remain above target) through 2018, as the peak effect of past referendum-related Sterling depreciation passes. Imported inflationary pressure is likely to ease faster than domestic inflationary pressure builds. This dynamic will be augmented by the appreciation of Sterling so far in January. It will also give the MPC scope to wait for more reassurance that spare capacity is being absorbed before acting to pre-empt a resurgence in domestically generated inflation.
What’s not to like for the BoE?: inflation likely to drop to target, growth around trend and the market pricing in another hike. We are miles away from the position last summer when the BoE felt the market was ignoring events. The market is doing the BoE’s work for it, so why rock the boat? Instead talk about the success: they smoothed the economic fall-out from sterling’s 2016 fall pretty successfully. Time to take a bow and put accusations of ‘cognitive bias’ where they belong.
That’s all fine and good, but the market is hyper-sensitive right now to anything related to DM monetary policy, so don’t sleep through this. There’s some event risk here.
Also, we’ll get the RBA on Tuesday and their quarterly monetary policy statement on Friday. Again, there’s no reason to believe anyone is going to try to upset any apple carts over there (on hold, no major changes in the forward guidance), but as Barclays notes, they’ll need to be careful:
The RBA will likely be extremely cautious in any language changes, so as to avoid spurring a sharp rise in market interest rates and the AUD, given its concerns about underemployment, low wage growth and high household debt.
Here’s where they’re at:
On the bright side for anyone who is still exhausted on the heels of the last two weeks which featured, in order, the start of a “hot” currency war and what certainly feels like the beginning of a tantrum episode, the U.S. data calendar is relatively light. That said, there’s no shortage of Fed speakers who will need to be careful not to say anything untoward where that means more hawkish than the market can stomach.
Additionally, the crypto crowd will want to note this:
That has the potential to move the market at a time when cryptos are vulnerable following a veritable deluge of bad news.
So get ready for all of that and pray we don’t get a repeat of last week because judging by the breakdown on the January inflows to U.S. equity funds, it looks like a whole lot of folks were piling into trading vehicles on the assumption that nothing could go wrong.
Full calendar via BofAML