Boy, we’re really grasping at straws now.
Somehow, headline writers on Tuesday managed to spin meager gains for US equities as a byproduct of a cooler-than-expected read on inflation for February as opposed to just stating the obvious, which is that stocks are meandering around aimlessly amid uncertainty on so many fronts that folks are mistaking a lack of clarity for calm.
To be sure, it’s not entirely consistent to say, as we did on Monday evening, that a “rogue” inflation print of any kind is one of the biggest tail risks for markets and then turn right around and downplay the latest sign that price pressures remain muted. That is, if the former is a big risk, then the latter is indeed good news as it’s yet another piece of incremental evidence to bolster the contention that the Fed has the cover it needs to remain “patient.”
But frankly, this just doesn’t feel as urgent as it did last February, when a hotter-than-expect AHE print crystallized a percolating inflation scare on the way to catalyzing the largest VIX spike in history. About two weeks later, the market scared itself into believing that the fate of the entire universe hinged on a single monthly CPI number that would either “confirm” or “disprove” the narrative.
At the time, the Fed was inclined to hawkishness as Jerome Powell had just taken the reins and US fiscal policy was set to turbocharge a late-cycle dynamic, raising the specter of an economic overheat. Fast forward 13 months and Powell got it all out of his system. Now, he’s inclined to lean in the opposite direction (i.e., dovish), the fiscal impulse is waning and even if the Phillips curve does come back to life, the Fed has been keen to suggest they’ll tolerate an inflation overshoot.
So, this whole “stocks breathed a sigh of relief as inflation came in cooler than expected” story just doesn’t have the same oomph as it did a year ago, and with rates vol. hitting new record lows seemingly every session (3m10y another low on Tuesday), it feels like it’s going to be a while before this story really “matters” again in terms of driving the market on any given day. And indeed, I suppose that’s the whole point – the Fed wanted to remove some of the urgency around this discussion so that it (where “it” is both the narrative and the FOMC more generally) wouldn’t be the proximate cause of any renewed bout of market turmoil.
And see, this is why trying to parse Monday’s “rally” and “explain” it via something other than the kind of flows-based analysis employed by Nomura’s Charlie McElligott on Tuesday morning, is an exercise in futility. Sure, there’s always a “reason” (i.e., someone or some machine, somewhere, was doing something and so were some other someones somewhere else), but right now, folks are fumbling around in the dark in a largely fruitless effort to decide whether there’s still gas left in the tank after the dramatic risk asset bounce that unfolded off the December lows. That means any one session is just a crapshoot – an amalgamation of various actors trying to parse the unparsable and the netting of those efforts. Of course that’s a description of all markets, all the time, but it’s even more apt right now.
The lack of participation by key investor groups has been well documented, which means either people will chase as FOMO kicks in or they won’t, and the risks are myriad, from an expected lackluster Q1 earnings season stateside (consensus expects negative profit growth) to questions about when a supposedly “done” deal on trade is really “done” and whether the incessant drumbeat of upbeat headlines around the negotiations means the prospective deal is already in the price (setting the stage for a “sell the news” dynamic if there’s even a hint that the two sides aren’t on the same page when it comes to issues that could immediately lead tensions to flare anew).
And then then there’s Brexit, which has evolved into something straight out of a deadpan sitcom that should have been canceled last year, but was inexplicably allowed to run for one more season. Theresa May’s deal was rejected again on Tuesday, setting up a vote on a “no deal” Brexit tomorrow. When that fails, the date for Brexit will be pushed out (that has a nickname now – “Brex-tension”), presaging who knows what. At this juncture, even populist sympathizers can’t spin it anymore – this is a stone, cold farce and it needs to be reversed. It’s clouding the outlook for Europe even further at a time when uncertainty is already running high and more generally, Brexit is a foul-smelling relic of peak populism ca. 2016. The only plausible rationale for not burying Brexit in the dark woods or tying a concrete block to its feet and throwing it in the ocean is that keeping it in plain sight is a poignant reminder of why allowing populist sentiment to fester is a terrible idea. For what it’s worth, after the bell on Tuesday, France was said to be preparing for a no deal Brexit.
On the global growth front, it’s the same story day in and day out: everyone is searching for signs of a “bottom”/”trough” and while there are arguments to be made that some “green shoots” have emerged, the hard reality is that it’s going to be months before anyone can say anything definitive about whether or not an “inflection” has been observed in the wild – your “leading indicators” be damned.
So, what you’re seeing (and what you’re going to continue to see) is price action driven in part by the dollar and in part by headlines out of China, whether that means top-tier economic data or clarity on the scope of Beijing’s stimulus efforts, both monetary and fiscal.
That’s the long and the short of things right now.
But mostly the “long”, because I’m “not into the whole brevity thing.”