Category Interest Rates / Bonds

Bond Market Agrees with the Fed

Two months ago - the bond market was at odds with the Fed. Fixed income markets felt the Fed were going to be forced to cut rates as many as three times this year. For e.g., the gap between the US 2-yr yield and the Fed funds rate was in excess of 100 basis points. At the time I questioned who would be right? Bonds or the Fed? Fast forward to today and the gap has closed considerably... bonds have now realigned with the Fed's way of thinking; i.e. expect higher for longer

Market Cheers ‘Strong’ Jobs Report

Payrolls rose 339,000 for May. That was well above the 190,000 expected - and what seems like a robust report. Is the economy really that strong? The devil is always in the details. From mine, I think the Fed will likely pause on a rate hike this month despite the so-called 'upside surprise'. For example, there is some 'soft' data in the report - soft enough for the Fed to not pull the trigger. Wage growth slowed and the unemployment rate ticked higher. Good news from the Fed's lens.

Ignore the Debt Ceiling Noise

Mainstream media remain fixated on 'debt ceiling' negotiations - warning of a "financial catastrophe" if this doesn't get done. This is the 78th time we have hit the so-called debt ceiling. And how many defaults has there been? Zero. A deal will get done. And if we are presented with a sell-off in markets - then it represents an opportunity.

Excess Liquidity Still Present 

Many people seem puzzled as to why the market continues to trade higher. For example, some readers have told me they missed the rally - wondering why things have not completely unravelled sooner. They've chosen to sit things out for one reason or another. And that makes sense... I'm sure they are not alone. Why are markets defying gravity? And how long could it continue? The short answer for a while yet. And the driver is liquidity.

Should We Cheer the Latest Inflation Report?

April Consumer Price Inflation (CPI) headline came in at 4.9% - its lowest level since Feb 21. However, Core CPI was 5.5%. As we know the Fed are more focused on Core. Here's what the Fed will be watching - it's all about labor and shelter.

“One and Done”… Not Yet 

The market wanted "one and done"... that was the expectation. Powell spoiled the party. Whilst the market expected a 25 bps Fed hike - what it did not know was whether any hike would be 'dovish' or 'hawkish'? For example, a dovish hike would be something like "we see the end of inflation... we're winning the fight". On the other hand, a hawkish tone would be sentiment to the effect of "it's still premature to make that call". We heard more of the latter... less of the former.

Pop then Drop! Green Light for Fed Hike

Investors cheered the news of a slightly lower than expected CPI print from March. However, Core Inflation exceeded expectations and actually increased. That's important - as that's what the Fed are focused on. Here's the thing: with Core inflation running at 5.6% YoY - don't expect cuts anytime soon. It's almost 3x the Fed's target. Yes inflation is cooling - slowly - but not where the Fed need it to be. From mine, you can lock in another 25 bps for May 2nd. Bond markets see that. Equities are yet to get the memo

What Don’t We Know?

There are some things we know to be (mostly) true. Inflation is coming down. The Fed is closer to the end of its aggressive rate hikes. Growth is slowing. And earnings are likely to decline in Q1 (after a decline in Q4). But what don't we know? What are the potential unknowns that could trip the market up? Three things to consider.

Yields Plunge – The Signal It’s Sending

Bond yields are falling. And fast. The question is why? In short, the bond market is now pricing in a recession. It sees growth stalling... and believes the Fed will embark on rate cuts in the second half. But have equities got the memo? Not yet. They are trading at close to 19x forward earnings... as big tech drags it higher. From mine, I think the market feels vulnerable here.

A Great Quarter… Can it Continue?

The S&P 500 recorded an impressive gain of ~7% for the first quarter. Optimistic on the resolution of the banking crisis - and prospects of Fed rate cuts in the second half - the bulls have regained their mojo. But this raises a question: why would the Fed cut rates? It's not because inflation is under control. For example, could it be because the economy needs assistance? Stress in the financial system? A credit event? If so, is that a good thing? Here I also look at the monthly chart - it deserves our attention.