Category Macro / Economy

Beware the “Bear Steepening” of the Curve

My last post talked about how the market is now taking its cues from bond yields (less so the Fed) Don't get me wrong... what the Fed does (or says) matters. We will hear more from Chair Jay Powell at the end of the week. Expect hawkish tones. To recap on what I shared earlier this week - globally long-term bond yields trade at their highest levels in 15 years. However, what's interesting is the shorter-end (e.g. 2-year and below) is not keeping pace. This has net the effect of "steepening" the all-important 10/2 yield curve. Question is - will that be a problem? History may offer some clues.

Why Core Inflation Will Remain Sticky

Markets got excited on news of the softer-than-expected CPI headline print today. Headline inflation came in at 3.2% YoY vs expectations of 3.3%. However, what deserves closer scrutiny is not the headline number - it's Core CPI at 4.7% YoY and shelter costs. For e.g., two-thirds of the monthly inflation increase came from shelter - where rents rose 0.4% MoM. This is now the 18th straight month the price of shelter has risen at least 0.4% MoM. But here's the thing - there isn't. much the Fed can do with monetary policy to change this.

Are Recession Callers Back-peddling?

It's the rally everyone loves to hate. Why? Because very few got it right. Most fund managers missed this rally entirely... thinking it was only a matter of time before things collapsed. The thing is - they haven't. I will admit - I also got this wrong. My initial target at the start of the year was 4200. If that broke - I was looking at resistance around 4500. The S&P 500 now trades 4536 - making me look foolish (and it won't be the last time I am sure). We're now just past the mid-point of the year - with the S&P 500 up 18.2% YTD. Remarkable by any measure. What are Wall St saying about the second half?

Can Consumers Continue to ‘Shop ’til they Drop’?

Never underestimate the US consumer's willingness to spend. And from mine, that's been the story of this year. Consumers have used whatever means available to spend, spend, spend. With ~70% of US GDP consumption based - that has also meant the economy managed to keep its head above water. But what does it look like going forward?Do consumers still have ultra-strong balance sheets to keep it up? And are rates eventually going to bite? I ask this because if US consumers are closer to maxing out their credit cards (with more than $1T in debt)... the odds of a recession sharply increase.

Hints of Mid-2007

It's been said that whilst history doesn't repeat - it often rhymes. For me, 2023 offers some parallels to 2007. To be clear, things are not exactly the same (they rarely are) - however I will demonstrate some similarities. What's more, I continue to remain long this market (with about 65% exposure). That said, if I'm correct (and I may not be) - it could raise a 'red flag' for 2024. Three things (1) fed monetary tightening takes between 12 and 24 months to make its full impact; (2) the economy also looked very strong into Q4 2007; and (3) sustained inverted yield curve cause recessions. In my view - the market is losing sight of the fact of how long the lag effect can be.

Bulls & Bears Can Make a Solid Case

It's fair to say this is one of the more hated stock market rallies. Why? Rarely have I seen so many caught on the wrong side of the trade. Sentiment is overwhelmingly negative. And yet the S&P 500 is up ~20% from its October low. This missive outlines both the bull and bear case. Either side can make valid arguments. This is what makes things so interesting. In short, you must have exposure to this market. However, you should do so with your eyes wide open.

Surface Cracks Appear in Credit

If there's one thing that keeps the US going... it's the availability of cheap credit. Love it or hate it - the US is a credit driven economy. If credit dries up - it's goodnight nurse. The US consumer now owes close to $1Trillion on their credit card - a 17% jump from a year ago and a record high. More than 33% U.S. adults have more credit card debt than emergency savings

Expensive and Risky

Stan Druckenmiller - one of the greatest investors of all time - is issuing a stark warning. Tread carefully. He echoes much of my sentiment of the past few months; i.e. not only do I think the market is fully valued at 19x forward earnings -- it represents meaningful downside risk. What concerns me most is what the market assumes will happen over the next ~6-9 months. E.g., at the time of writing, it sees rates being slashed three times this year. Is that realistic with Core CPI YoY is still traveling around 5.5%? It also sees earnings growth. Will that happen opposite a recession? It's a long list of assumptions...

A Very Narrow Market 

Last week all eyes were on large cap tech earnings. They delivered a mixed bag... but on the whole 'better than feared'. Q1 earnings didn't fall off a cliff. Single digit growth (top and bottom line) was largely cheered - which highlights how low expectations were. Next week eyes turn to the Fed. The market has priced in a 25 bps hike for May - but will it be a 'dovish' hike - where they offer language to suggest a pause in June? Or will they say "there's more work to do"?

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.