What Markets Want (Last Train To Tuckahoe)

Retail sales will be the marquee data point in the US this week.

It would be an understatement to say there’s concern in some corners about the US consumer. The January jobs report suggested the services sector remains mired in a recessionary malaise, even as ADP and PMIs send conflicting signals.

The self-referential nature of the US economy (the whole thing depends heavily on services sector employees consuming services when they’re not providing them), means a prolonged period of curtailed activity in leisure and hospitality is a decidedly unpalatable proposition. The longer employment takes to rebound in services, the more difficult it will be for consumption to stage a sustainable recovery.

Data out last month showed retail sales disappointed in December. A downward revision to November’s already poor print was insult to injury. No one wants a repeat of that.

Of course, a big part of what’s holding back hiring in the services sector is the virus or, more to the point, containment measures aimed at stopping the spread. The good news on that front is that America’s COVID caseload continues to decline.

Worries over new variants notwithstanding, things seem to be getting better. Friday marked the fifth day in six that new daily cases were sub-100,000, for example. The 7-day moving average is now back in the five-figures. Hopefully, it will keep falling.

As some states move to lift mask mandates and otherwise loosen restrictions, experts are concerned. “Now more than ever, with novel variants, we need to be strategic with these reopening efforts and be slow and not rush things,” George Mason epidemiologist Saskia Popescu told The New York Times. The Biden administration is pushing to reopen schools, but that comes with risks, and there’s considerable debate about whether teachers need to be vaccinated first.

Unfortunately, deaths are a lagging indicator. While cases are plunging, fatalities aren’t. The US is still averaging more than 3,000 deaths per day, even as hospitalizations dive.

That gives you a quick snapshot of the virus situation stateside. The big debate in market circles (well, outside the conversation about what a vaccine-resistant strain might mean) is whether and to what extent the reopening that’s assumed to accompany mass vaccination will mean for inflation and bond yields, especially as new stimulus makes its way into the veins of the economy.

There’s no shortage of “tantrum” talk, and while there are plenty of good reasons to fear such an episode, the Fed has seen this movie before. Jerome Powell still has WAM extension in his back pocket and a rapid backup in long-end yields isn’t just undesirable from a VaR shock perspective. This time, a tantrum would risk a rapid tightening of financial conditions and higher borrowing costs at the worst possible juncture. Those outcomes are non-starters. It wouldn’t be allowed to happen.

That’s not to say yields couldn’t theoretically run higher before the Fed has a chance to put the brakes on. It’s just to say that the brakes would presumably be applied more quickly than usual, especially with the memory of last March still fresh (the Treasury market effectively “snapped,” as market participants sold everything that wasn’t tied down to raise dollars, including Treasurys and gold).

With that in mind, traders will get a chance Wednesday to parse the January Fed minutes for information that probably isn’t there.

That’s the great thing about FOMC tasseography — everyone hears what they want to hear. Before COVID (i.e., when there was more than one thing that mattered in the world), this was an especially amusing dynamic to observe. The Fed was subject to the “hall of mirrors” effect, so traders listening and reading for clues were actually hearing themselves, only on a delay, sometimes without realizing it.

Anyway, that’s less relevant now. While there are plenty of folks willing to argue that inflation is just around the corner and the Fed will soon discover that it’s difficult to rein in once it gets moving, all communications will reiterate an intention to keep policy ultra-accommodative for the foreseeable future. Last month’s brief taper banter disappeared into the ether, as officials seemed to realize the potential for a communications misstep.

“Any insight from the FOMC Minutes as to the Committee’s thoughts on eventual tapering in the medium-term (2022) and/or any near-term urgency for bringing forward a fine-tuning adjustment to IOER/RRP will undoubtedly garner attention,” BMO’s Ian Lyngen and Ben Jeffery said, in their week-ahead outlook. Commenting further on this week’s data docket and potential tweaks from the Fed, Lyngen noted that the relevance for rates is low compared to last week’s events (i.e., CPI and supply). “The winter has already been written off in terms of consumption and the debates within the Fed are for the wonkiest at heart – let’s face it, this ain’t Jaycoin,” Lyngen quipped.

That pretty much says it all. Markets want more crypto. They want more GameStops. They want more Cathie Wood. They want more cowbell.

I have a very foggy memory from around seven years ago of attending a small gathering to inaugurate a new investment management firm dedicated to innovation and generally focused on “the future,” broadly construed. If I recall that evening correctly, it was a quaint event held on the second floor of a nondescript address in Manhattan. I only attended because a friend of mine in advertising never missed an opportunity to network and for whatever reason, she thought it might be beneficial if I tagged along.

There were tables set up around the room and each one had marketing material discussing a different investment theme. I wandered around long enough to take full advantage of the free drinks. My friend introduced me to Cathie. I shook her hand, thanked her for the drinks, and promptly left.

I muttered something totally unnecessary like “that’s never going to be anything,” as I stumbled off towards Grand Central to catch the Harlem Line to the Tuckahoe station.

Good judge of character, that Heisenberg.