Equities in a holding pattern
The latest is that market are expected to fall after US President Donald Trump tweeted about US plans to undertake military strikes in Syria. This is after an up day that follows a down day for stocks. The days of low volatility are well and truly over.
The VIX is trading above 20 now, up from lows below 10, before the ‘Great Correction’ in early February. I was just re-reading what I wrote at that time. And what caught my eye was the part where I said, “For now, I’m not particularly worried. When the fundamentals take a knock, that’s when we should worry. Let’s wait for the CPI next week and revisit this conversation.”
The CPI numbers were benign. But now we have new CPI numbers. They are less benign at 2.4% in the last year. And so, the wireless drag on inflation data is over. Big one-time wireless phone plan rate changes are no longer a factor. So these numbers should end the concept that ‘transitory factors’ predominate.
But the numbers only reinforce the concept that the Fed is going to continue to slowly increase the federal funds rate until we see weakness in the real economy. For example, core CPI is up an annualized 2.9% in the last three months.
For me, that means a back and forth see-saw that has volatility elevated, but without any major moves until we get a big catalyst. The short vol trade is over. But, for most people, so is the idea of a melt-up.
Bonds are on hold too
Notice that bonds are going nowhere while all this happens. After Trump’s comments, yields went down to 2.77% on the 10-year from 2.80%. And now, they are even lower, at 2.76%.
Meanwhile, with the Fed finally normalizing rates, 2-year yields have a floor. Those yields fell too after Trump’s military strike comments. But the gap is now 47 basis points between the 2- and the 10-year bond.
For me, that puts us in the worry zone. And by that I mean that each rate increase will flatten the curve. Unles long-term rates rise, we are two rate hikes away from inversion. And you’ll notice the first link in my list below is on the global economy losing momentum in March.
As Wednesday begins, the question has to be: is the slowdown temporary or is it going to be more pronounced? And if it is pronounced, what do central banks do?
With that, I give you today’s links.