Approx 2 months ago – it felt like markets were starting to hedge their bets. How could I tell? Whilst the market was trading near record highs (around 6100) – momentum was fading. I commented on both the weekly MACD and RSI falling – whilst prices remained high. Technicians call this “negative divergence”. Quite often it suggests prices are at greater risk of easing. Since then they’ve dropped ~6%. The week ending March 7th was the worst week for the year and the third straight week of losses… more to come? I think so…
Monetary policy
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Fed Minutes: Time to Pause QT?
Four things caught my eye with yesterday’s release of the January Fed Minutes: (i) worries over tariffs and their impact on inflation; (ii) some members suggesting the fed funds rate is now close to neutral (not the majority); (iii) concerns over the pace of balance sheet reduction targets; and (iv) inflation needing to come down more before lowering rates further. Makes sense to me… But I can’t help but wonder when Powell ran a victory lap last September – whether it was premature.
The Key to Growth: Business Investment
With 10-year yields trading around 4.50% (with the possibility to go higher) – why haven’t equities sharply corrected? It’s a good question. For e.g., on the surface, one might think equities would struggle given the zero risk premium investors are receiving. But that has not been the case. The stock market has withstood the sharp rise in bond yields (for now anyway). However, I believe there is a simple explanation. It’s the amount of liquidity in the system. Liquidity is abundant – evidenced by the very low credit spreads in the market (participants see very little risk). Generally credit spreads widening are your first sign of trouble.