Worth Mentioning

Admittedly, I’m scraping the barrel a bit here, which is what happens when it’s Wednesday in June.

“Worth mentioning” is highly relative on days like these.

But for what it’s worth (which is “not nothin’,” so to speak, for those with simple, balanced portfolios), the stock-bond correlation has flipped back negative, at least on one lookback (figure below).

This appears to be a consequence of the post-FOMC washout, during which the long-end initially rallied on what now seems like a false “growth scare” optic courtesy of positioning unwinds in steepeners.

To call the last five sessions a “whipsaw” would probably count as an understatement. “Changes in curvature have been historically extreme,” Bloomberg’s Stephen Spratt wrote Wednesday, noting that over the past four sessions, open interest in futures “collapsed, with the equivalent of $37 billion in 10-year bond positions being wiped out.” Importantly, Spratt noted that the seemingly exaggerated moves in the curve “mean it’s not just duration trades buckling, but popular curve trades and relative value also getting unwound.”

Last week’s curve fireworks were accompanied by a swoon in equities which accelerated Friday thanks in no small part to Jim Bullard. Fast forward four sessions and things look materially different. The figure (below) is a simple way to visualize it all.

Again (i.e., in case it isn’t clear), there’s more noise than signal right now. Fed officials aren’t helping. We’re now stuck in an increasingly ridiculous semantic debate about what constitutes economic “progress” at a time when retail sales are miles above pre-pandemic levels and the US economy is, on many accounts, already overheating.

That’s not to suggest things are well and truly “fixed” — just ask the ~8 million people who lost their jobs during the pandemic and have yet to reenter the workforce. It’s just to state the obvious: There’s been quite a bit of “progress,” and it has indeed been “substantial” on many fronts. The Fed’s forward guidance needs a refresh. It’s a caricature of itself by now. As I put it Tuesday,

It’s difficult to find the right adjective when it comes to describing how overtly silly the semantic acrobatics have become around “progress.” There’s been progress, yes. But is it “substantial”? If so, how substantial? And assuming you can quantify it, is it substantial enough? Yes? Ok, well, substantial enough for what? Just talking about a taper? Or actually announcing a timeline? Certainly not substantial enough for rates to be higher. For that, we’d need to see some really substantial progress. And so on.

Raphael Bostic was at least a semblance of forthright in his remarks on Wednesday. “Given the upside surprises in recent data points, I have pulled forward my projection for our first move to late 2022,” he told reporters. “I have two moves in 2023.”

Now that’s hawkish. Or at least as it relates to US monetary policy post-pandemic.

As far as “substantial forward progress” goes, Bostic said if you ask him, the Fed is “close to meeting that standard.” He got pretty specific about things. “If the next few months print at levels comparable to what we have seen recently, I feel we will have reached that standard,” he remarked. “Given that is a distinct possibility, I think it is fully appropriate to be planning to start the tapering process.”

Markets were briefly perturbed, but it felt like folks had already reached Fed fatigue with two sessions still to go for the week.

Note that on BofA’s count, there were 195 rate cuts globally in 2020 versus just a handful of hikes. In 2021, there have already been 19 hikes against just eight cuts (left figure, below).

At the same time, the bank sees profit growth peaking (right figure, above). “‘Peak profits’ means bad news won’t translate into good news,” the bank’s Michael Hartnett wrote, noting that the BofA Global EPS model suggests the global EPS peak was 40% in April and should decelerate to 20% by late summer.

Writing this week, SocGen’s Andrew Lapthorne noted that earnings momentum “remains strong, with 62% of all global estimate changes for 2021 coming through as upgrades and with a high percentage of those upgrades coming through in the reflation sectors.” The profit momentum story, he said, “is still aligned” with reflation, even as the rate is slowing with “base effects from last year’s slump [nearly] behind us.”

Notably, expectations for the first Fed hike in a JPMorgan survey weren’t dramatically different when you break down responses received prior to the June FOMC versus those received in its aftermath (figure below).

The only thing that really sticks out is that, post-June FOMC, the percentage of market participants who think the Fed will never hike (i.e., “2024 or later”) dropped precipitously.

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One thought on “Worth Mentioning

  1. Good to see an eloquent explanation of what I assumed for totally different rationale to be Confirmation Bias on my part . My simple explanation would be that on Biden’s election victory it became very likely that we as a Nation would drift closer to deficit spending (I forget the three letter term used to describe that phenomenon ) The majority Party will not give up that Tactic until it fails or there is a change in the (vote plot ) in Congress. Oh ,,such are Wednesdays in June….

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