Weird, Wild And Crazy

On Friday, someone described the November jobs report as “one of the weirdest I’ve ever seen.”

I’m not sure I’d put it that way, but there were contradictions — high points, low points and everything in-between.

To the extent it was “weird,” it marked a fitting end to a somewhat convoluted week dominated by handwringing over a more transmissible COVID variant, Jerome Powell’s hawkish pivot and concerns that the interplay between the two presages a policy mistake.

US equities were a pinball machine, careening wildly between large losses and gains. Realized vol surged (figure below).

Systematic de-leveraging was surely in play as realized “reconciled” with readily apparent angst in skew, term structure and implied.

Vol Control cut exposure to US equities by nearly $47 billion in just a week, Nomura’s Charlie McElligott said Thursday. If large daily swings persist, trailing vol window inputs will get yanked higher, dictating more de-allocation flows on a lag. CTA de-leveraging could be in play too if spot keeps falling. 

As discussed at length here on Thursday, factor and thematic swings are extreme as markets attempt to grapple with the implications of an accelerated taper and “early” rate hikes. Broadly, the S&P logged back-to-back weekly declines (figure below).

That’s a rarity in 2021. Big-cap tech is down over 5% in two weeks.

Bonds ended a similarly wild week with a flourish. Yields were markedly richer Friday, with the 10-year falling as low as 1.334% on heavy buying into the 3 PM ET close. “Initially choppy price action after mixed November employment data gave way to a one-way up-trade led by long-end and intermediates,” Bloomberg’s Edward Bolingbroke wrote, recapping the rally.

“This afternoon, the 10-year yield drifted into our target range of 1.25%-1.35% with far more confusion than fanfare,” BMO’s Ian Lyngen remarked. “Explanations for the magnitude of the move include a degree of capitulation ahead of the weekend,” he went on to say. “After all, if Powell’s retirement of the transitory language and a 4.2% unemployment rate can’t trigger a Treasury selloff ahead of next week’s 3s/10s/30s auctions, then it might be time to cover.”

The market is still pricing almost a full hike into the June Fed meeting and nearly two hikes by December 2022. The nominal curve is collapsing (figure below).

The 5s30s narrowed ~10bps on the week. As Lyngen went on to suggest Friday afternoon, fading the flattener is very difficult at this juncture. On one side is Powell’s hawkishness and on the other Omicron. Either way, it’s a flattener.

Not everyone is convinced, though. Or at least not totally. “We continue to think that the market is too optimistic in pricing in the first hike in June 2022 and like Sep23-Sep 24 Eurodollar as well as 5s30s steepeners,” TD wrote Friday. Earlier this week, the bank said “the curve is likely to remain under flattening pressure amid the pulling forward of hikes, but we think the risk-reward is not great for flatteners.”

BofA’s Savita Subramanian, who’s been cautious on stocks for quite a while, told Bloomberg Television Friday that, in her opinion, “the probability of a 10% [stock] correction in the near-term or over the next 12 months is elevated.” As a reminder, Subramanian’s 2022 year-end S&P target is 4,600 (table below, from the bank’s outlook).

“[I don’t] want to sound too alarmist,” she went on to tell Tom Keene, noting that the bank’s forecast is for a flat “tough grind.” The bubble, Subramanian said, isn’t in stocks. It’s in bonds.

Last month, Macro Risk Advisors’ Dean Curnutt echoed that, warning that the “central risk” emanates from what he described as “the absurd pricing of the ‘risk free’ asset upon which everything else in the world is richly priced.”

In the near-term, it’s tempting to suggest markets may be in for another wild December, à la 2018.

Meanwhile, on a funnier, albeit still foreboding, note, Charlie Munger told the Sohn conference in Sydney that the current environment for markets is “even crazier than the dot-com era.”

After weeks like this one, it’s hard to argue.