Slow Motion, Flow Motion

Slow Motion, Flow Motion

US equities managed a weekly (and monthly) gain as Americans looked forward to a long holiday weekend.

The S&P snapped a two-week losing streak and traded near record highs as market participants largely shrugged off the hottest core CPI print since 1992.

Inflation concerns are evident among consumers, and monthly gains on key price gauges show it’s not all base effects. But the Fed’s nods to normalization remain confined to preliminary taper talk, and “transitory” is still officials’ favorite adjective. That’s enough to calm markets, and frankly, there’s scant evidence to suggest the data or corporate earnings are about to inflect for the worse.

“The pick-up in taper talk from monetary policymakers has — as with so many other potentially market moving events — led to surprisingly little price action,” BMO’s Ian Lyngen and Ben Jeffery wrote Friday. “We’re less convinced this is a reflection of the evolving discourse falling on noise-canceled ears and instead, serves as a reminder that the eventual scaling down of asset purchases is still far enough out on the horizon not to trigger significant price action,” they added.

“Get ready for a volatile week ahead as we get ISM and employment data for May,” SocGen’s Subadra Rajappa remarked, in her weekly wrap. “Fed speakers continue to remain optimistic on the outlook, which should set the stage for taper discussions at the June FOMC meeting,” she said, noting that “the key risk” is a letdown in the data that makes “it harder for the Fed to discuss tapering, especially as a cash glut and distortions in front-end markets induces a sense of urgency to gradually move away from accommodation.”

Notably, junk bond sales broke a record for May. Supply was more than $46 billion (figure below). Last May saw nearly $44 billion. This month was among the ten busiest ever for the high yield market.

In IG, the monthly total exceeded $135 billion, bringing YTD high-grade issuance to $685 billion.

And yet, junk bond funds have seen four straight weeks of outflows (figure below).

IG funds took in just $911 million, meaning last week witnessed a net outflow from credit funds, according to Lipper’s data.

Meanwhile, you know the story for equity fund flows. The bonanza continued last week, according to EPFR. Global equity funds took in another $17.9 billion. That brought the YTD total to an astounding $512 billion (figure below).

Writing in the latest edition of the bank’s popular weekly “Flow Show” series, BofA’s Michael Hartnett reiterated a familiar thesis. The combination of peak positioning, policy and profits (the “3 Ps,” as he calls them) along with rising rates, regulation and redistribution (the “3 Rs”) presage “low or negative” returns for equities and credit out three to six months.

Circling back to inflation (which managed to reclaim the limelight from crypto after last week’s Bitcoin dramatics), TD’s Rich Kelly suggested “the market’s current fear of high inflation may turn out to be the misdirection of the year.”

“If inflation is the smoke, economic momentum is the fire that creates it,” Kelly wrote, in a note dated Thursday, flagging “mounting evidence” that economic momentum may have peaked in the US. “Ample liquidity and scarce assets have left many investors in FOMO-mode,” he said. “But the summer looks likely to see us shift to trading SlowMo – slowing momentum as economic growth moderates closer to normal.”

2 thoughts on “Slow Motion, Flow Motion

  1. Three weeks past my second Moderna vaccine, I got on a plane this morning and flew to the Florida panhandle to visit my son. I have not been out much in the past 15 months and today has been shocking. Maybe this is just Florida- but I did not see any masks and the bars and restaurants were packed. The airports were busy- although not at pre-covid levels. Seems like this summer, money will be spent on services, not stuff.

  2. With all the trained psychologists, economists and Nobel laureates out there it seems no one understands the consumer. Makes it hard to manage supply/demand curves.

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