Bond Market's Worst Fear
Bond Market's Worst Fear
CLUB/EDGE Client Post - unlocked
January CPI data surprised. It was strong enough to trigger a VIX surge of size and push back the Fed's first cut to June.
Remember, a few weeks ago, March was favored with 6-7 cuts for the year. Now, three are expected.
In short, we are back to levels last seen prior to the Dec FOMC meeting, but with a few notable differences:
Stocks had not been selling off with rising USD and yields past few weeks. They did today. Sharply.
VIX gained 39%, which was a 6 sigma move.
SPY had not traded down 2% in over 70 days. We closed -1.36% but intraday we had a -2.01% pullback. It was defended, this time.
The 3M yield spiked above its 200D, signifying (to me anyway), this is headed higher.
The 2Y T-note future bond fell back to the Dec FOMC gap fill of 101'31. I had posted this trade for clients Feb 2nd.
USD marched higher into 105 territory as WTI moved higher but RBOB spiked 11% higher (Client Brian positioned us well).
The 10Y yield tagged my 4.31% but intonates 4.36% before a real test of wills.
Russell 2000 dumped nearly 5% at the lows, finishing down 4%.
USDJPY spiked above 150, and now I wonder if BOJ yen intervention might not stop its rise without coordinated USD swap help.
We went from max bullishness to max bearishness in 24 hours. Puts are exposed to a squeeze unless we get follow through to the downside.
Simply put: markets were due for a pullback, and this CPI surprise was the perfect excuse.
As I warned last week and again Monday: We are in the 'window of weakness' during the seasonally weak month of February.
Any economic data point can move markets, but a hot CPI on the eve of VIX expiration in the week before monthly SPX expiration (after SPY has moved higher in 14 of the past 15 weeks), was the trigger to move markets more than most expected.
Keep in mind: It is one report, and January tends to have the biggest issues with seasonal adjustments. I would normally lightly dismiss the report, as one 'bad' print does not a trend make.
But... my yield spike move was big and the USDJPY spike was also worrying.
I think something is in the bush, enough that I want to tread very lightly with existing and upcoming trades next few weeks.
I don't want to assume inflation will take off again, but so far this year, Treasury yields have risen and it hasn’t hurt equities - largely because it has coincided with stronger growth expectations.
It's one thing for hotter inflation data to lead to fewer cuts, and modestly higher yields, but if my rate of change indicator in my intermarket yield analysis starts to aggressively move higher, risk assets will be at risk of moving lower.
So for now, I mostly expect a quick market bounce to follow-through then digestion period in equities - not a material drawdown.
But I will not hesitate to turn bearish if USDJPY triggers/stays above 152 and the 10Y triggers/stays above 4.36 and my 3M triggers/stays above 5.27.
Craig, our MacroAdvisor EDGE Manager, posting in #macro-advisor-craig channel, was waiting for this:
Basically what bond market is doing now is coming to grips with reality that the loosening of financial conditions over last 3 months made the achievement of 2% inflation unattainable. Growth and inflation bottomed and now the Fed is in a box, with an inability to start cutting. So we are pricing out these cuts quickly which is why 3m yields are gapping higher. PPI will important on Friday because it leads into core PCE calculations for the end of the month so if these readings come in hot too, markets are gonna get smoked as more of the cuts are removed for 2024.
Geoffrey, our MacroAdvisor EDGE contributor, posting in his #graphcall-macro-education channel, was much more alarmed:
The Fed and the Treasury have failed.
The Fed CAN NOT control inflation without a fiscal plan now.
Higher rates lead to MORE INFLATION, not less in fiscal dominance.
People not used to EM don't understand this.
To which I piped in:
My early “yield spike” feel happened today, so all eyes on 4.33-4.36 for 10Y but check out the 3M! I’m really worried about this one picking up speed to the upside.
Geoffrey responded succinctly:
DISINFLATION IS NOT POSSIBLE IN FISCAL DOMINANCE.
IT IS NOT A THING.
The only way to stop inflation is a fiscal plan
I am surrounded by sharp minds, and our trading success is a direct result.
I still think we’re going to have a snapback rally - however short-lived - based on option structure. After that, we shall see if option structure combined with fiscal dominance aligns to drive stocks higher ala 1995-1999-esque - the basis of my MarketWatch interview today.
But given the concerns of both of our macro advisors, I think we can consider the risks are rising that my 'crash up' scenario may not take flight.
My end-of-year interest rate spike may get pulled forward (2024 Prediction: “10Y into 6.5% by YE 2024”).