Can’t-Lose Thinking

Can’t-Lose Thinking

With the dollar coming off its worst week since December (figure below) and market participants keen to embrace a kind of “heads I win, tails you lose” narrative when it comes to the interaction between US economic data and stocks, sentiment felt bullish headed into the new week.

Of course, that’s a completely anecdotal assessment. And it could quickly prove misguided. The point is simply that, as SocGen’s Kit Juckes once put it, the world is a friendlier place when the dollar is on the back foot and last week’s big jobs miss is now widely seen as allaying fears of an “early” start to taper talk from the Fed.

“Looser policy is supportive of equities but detrimental to the dollar,” Bloomberg’s Vincent Cignarella said Sunday. “Equity gains will likely extend while the dollar weakens maintaining the inverse correlation” between the S&P 500 and the greenback.

This week’s data will be contextualized by reference to NFP. Whereas a blockbuster jobs print would have imbued CPI and retail sales with a bit of extra meaning for traders attempting to time the Fed, lackluster payrolls effectively renders the inflation and consumption data inert from the perspective of the taper discussion, barring huge upside surprise(s).

The biggest risk now may simply be the “can’t-lose” mentality (as Bloomberg put it) among investors. The idea is that “healthy” inflation and robust retail sales (and perhaps another pandemic-era low on jobless claims) would help offset the payrolls miss, thereby reviving the recovery narrative and bolstering reflation winners. If, on the other hand, the data comes in weak, that’s just another excuse for the Fed to stand pat for the foreseeable future, which could weigh further on the dollar and bolster big-cap tech. Either way, stocks win.

Throw in a record pace of earnings beats (figure below) and you’ve got a recipe for further upside.

68% of reporting firms beat on the bottom line by at least one standard deviation. That figure is 57% for top line beats, according to Goldman.

Again, it all has a kind of “what could go wrong?”-type feel to it, as much as I despise resorting to tired market clichés.

The Colonial Pipeline cyber attack is sure to make headlines all week. 24 hours of radio silence from the company into Sunday afternoon on the East Coast didn’t do much to allay supply disruption concerns. One potential problem: Any related surge in fuel prices could add… well, it could add fuel to the fire vis-à-vis the inflation narrative.

The timing leaves something to be desired. Vaccinated Americans are gearing up (figuratively and literally) to hit the road for summer vacations after a year spent staring bleary-eyed at screens and monitors.

Neel Kashkari underscored Fed patience over the weekend. “Roughly eight to 10 million Americans ought to be working right now if the COVID crisis hadn’t happened,” he told CBS’s “Face The Nation” on Sunday. “So we’re still in a deep hole.”

Kashkari conceded that “there is some truth to the [idea that] unemployment benefits may be a disincentive,” but he also cited “childcare shortages” as another “big impediment” for the labor market and insisted that “we still need to do everything we can to put those folks back to work more quickly.”

For the Fed, that means keeping rates glued to the lower bound in what may as well be perpetuity and pledging to telegraph any discussion around scaling back monthly bond-buying months in advance. It’s safe to say that discussion has been postponed, although clearly, there’s plenty of time for the labor market to roar between now and August/September, when some believe the FOMC will begin to gingerly broach the idea of a taper.

Until then, you’re either with the Fed or you’re fighting them. Best of luck either way.


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