‘You’re Going The Wrong Way!’

I’m not sure I would have done that if I were you.

Remember that scene, in Planes, Trains, and Automobiles, where Steve Martin and John Candy end up driving down the wrong side of the highway and the couple in car tries to warn them that they’re “going the wrong way?”

 

If you were buying stocks on Wednesday after that CPI print, you’re John Candy. 10Y yields are the couple in the other car.

“Oh, they’re drunk. How would they know where we’re going?”

The knee-jerk reaction to the blowout CPI print was predictable and probably “correct” where “correct” means that if the bond selloff and the looming fear that an inflation shock is about to bring forward the end of the cycle and force the Fed’s hand, well then it’s time to get the hell out of dodge. But again, “how do bonds know where you’re going?”

Stocks surged on the day. This was the 9th SPX 1% move of 2018 – as far as I can tell, that’s more than all of 2017:

SPX

Fourth straight day of gains for the benchmarks.

Stocks

Yeah. I sincerely hope you people know what you’re doing.

Because before the cash open, folks were singing a decidedly different tune. Have a look at this:

Futs

And here are your Dow futures on a hot CPI:

Dow

If you’re worried about the bond selloff, you should stay worried, because Treasurys plunged. Summarizing (via Bloomberg): By close, 5Y and 7Y yields were higher by 10bp, while 10Y ended 8.5bp cheaper after topping at 2.917%; belly-led weakness pushed 5s30s flatter by 3.6bp, reaching as low as 51.1bp during peak morning sell-off.”

10Y

But apparently no one is worried in stock land. Put prices diving:

As noted first thing this morning, overnight was all about the yen as USDJPY broke below the 2017 lows seemingly presaging more yen strength ahead. “The yen, which no-one is focusing on, makes me more nervous. Huge speculative yen shorts have also been accumulated (v the $), at a technically important moment,” Albert Edwards wrote on Wednesday, adding that “the yen positioning makes it far more likely the dollar will fall below Y107.90, and the yen could quickly surge once this key trendline is decisively broken.”

yen

Well consider that already in the books. The dollar tried to rally after the CPI report but ultimately that did not work out, suggesting that there are underlying problems here that cannot be “fixed” with an above-consensus read on inflation and rising yields.

USDJPY

Have a look at this:

USDJPYUST

And remember, the yen-Japanese equity link is starting to reestablish itself:

TopixYen

The dollar was down versus all of its G-10 peers after the CPI rally was faded “big league”. “Traders were hard-pressed to explain the sudden downdraft in the dollar, which came around 10:15am ET, as U.S. stocks reversed steep losses shortly after FX option-expiry and left the USD plumbing fresh session lows,” Bloomberg writes, recalling the action.

DXY

Big day for crude after the EIA report showed a smaller than expected build (Cushing supplies fell by the most in four weeks). 

WTI

Gold surged:

Gold

As far as Europe goes, let’s play “spot the U.S. CPI print”:

Europe

Emerging market equities rose again. The EM ETF is up a massive 8% since the lows on Friday (emerging market shares had fallen into a correction last week):

EEM

The CBOE EM ETF Volatility Index plunged the most in six months.

As noted first thing this morning, Hong Kong shares rallied sharply on Wednesday in a continuation of the reprieve from last week, which was the worst stretch since the crisis:

HangSeng

Finally, for your moment of zen, here is Mick Mulvanely explaining how much Trump’s military parade will cost under different “lengths” and conditions….

 

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6 thoughts on “‘You’re Going The Wrong Way!’

  1. best day i ever had in the markets. that’s 45 years of this @^#$&*%#^**.
    yes i understand the issues–bigly they are.
    and i do think this is a short term trade–6 to 12 months maybe.
    at this point–it looks like it will be a bond rout–but once again we can only hope it doesn’t come crashing down tomorrow. it could.
    no guts no glory.
    good luck all–i know i am going to need it.
    thanks again Mr. H–love the humor and insight!
    you have been a great help making me money–and that’s what counts.
    sb

      • Lance
        i think i am not. i was sick and tired of being short.
        under advice i made a big short term trade, still holding a fair amount of qid. sds, bis and the vxx. i’m still a big loser in the vixx.
        i am setting up backet trades for a sell now and everything with trailing stops (rarely to they respect limit stops). assuming i can get out.

        the bond thing–i am short just like everyone else. i chose long dated put options and average in with proffit. doing very well there.
        i was hoping to see 3 to 12 months up in the cost of manufactured materials, an inflationary tilt. things like battery storage or rare earth metals. also a big play in uranium and OBOR positions. the one belt one road thing is going to be big. china is going to own Greece. that’s a good place to build lots of big stuff–they already are.

        i hope Mr H and his buds weigh in some more on the bond issue. what is the damn breaking point???–a lot of guessing around 3.0 but i think it will be a little higher. i also think we could get another round of qe kind of like the one we just got (infrastructure spending) and or more bond buying buy the fed. eu is doing it.
        it’s the big kick the can one last time that’s for sure(i think).
        any thoughts on the bond issue??
        thanks
        sb
        that was a long read–just need to vent–stress and all–hahaha.

  2. I’ve been catching up on all your articles, and more often than not I’m not smart enough to figure out what you think should be obvious to me. So, I was especially grateful for this line:

    “If you were buying stocks on Wednesday after that CPI print, you’re John Candy. 10Y yields are the couple in the other car.”

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