The Saturday Hark Back - 16 Dec 2023
Capturing the themes of the week when there’s more time to digest them.
The Hark Back
The key narratives that drove markets last week:
What a week and way to finish 2023...
Fed speak has started with some push back on a “premature” March cut
Are the Fed simply overcommunicating to the market?
Will 10 years stick sub 4%?
but 2024 is scheduled to be the year of cuts...
As equities soar, there are issues hiding in plain sight
should we be shopping for portfolio hedges?
Top 10 Reads of the Week on Harkster.com
Top 5 Podcasts of the Week
The Week Ahead
What a week and way to finish 2023...
US CPI - Nov headline softening, but core sticky.
Are we at risk of being too dependent on the energy price slide to finish the disinflation trend?
US PPI - better news here with YoY at 2% vs exp 2.2%
US Retail Sales - it's the season of good cheer and the consumer is spending, 0.3% vs exp -0.1%
Atlanta Fed GDPNow revised higher to 2.6% from 1.2%
Fed - regime change. The tone has flipped from "higher for longer" to worrying about staying "too higher for too long". Goldilocks for assets as Fed may cut before inflation gets to 2%.
ECB - sorry Gov Powell but despite recessions in Germany and Holland we're not ready to pivot yet
BoE - our inflation is higher, wage growth over 7% ... we're still team H4L
Largest OPEX ever - over $4.9 trillion of gamma rolled off
and after all that, the Fed speak has started with some push back on a premature March cut…
Williams - “We aren’t really talking about rate cuts”... (errr but the dots says that you are??????)
"Have we gotten monetary policy to a sufficiently restrictive stance in order to ensure that inflation comes back down to 2%? That’s the question in front of us,”
Bloomberg - Fed Officials Push Back on Talk of Rate Cuts Early Next Year
Bostic - two rate cuts in 2024 but not starting until the third quarter.
Goolsbee - always on the dovish side of the spectrum...
but didn't we hear Powell say "officials discussed the prospect of easing policy"
Bloomberg - "Less than two weeks after saying it would be “premature” to speculate on the timing of rate cuts, Powell said officials were starting to turn to that question. That begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today,”
Bloomberg - Fed Pivots to Interest Rate Cuts in 2024 as Inflation Heads Toward 2% Goal
Are the Fed simply overcommunicating to the market?
Is there a benefit to the dots? In the past JPow has said they become extinct as soon as they're printed. The inflation and growth forecasts give the market enough guidance as to what the CB want. So are the dots an effective tool or are they causing over analysis on the day and thus inducing unnecessary volatility around monetary policy meetings.
How can you send the market a forecast of where you would set policy in a years' time and then say that you are not "speculating" about what will happen to rates.
The market focuses on the forward not spot, so when the Fed tells us there will be 75bps of cuts next year and removes the last hike, that's as good as cutting now. The expectancy trade doesn't wait for the cut to be actually delivered. The market has to price the probability of it happening by March. Furthermore, it was clear from JPow communication that they've moved from a regime of higher for longer to worrying about staying too high for too long.
Will 10 years stick sub 4%?
We're entering a period, when seasonals point to higher yields. The last few weeks of a year, ahead of a wave of Q1 issuance, pressure can appear in rates markets as portfolios make room for new paper. Furthermore, if the Fed has gone too early when those with softer growth dynamics are pushing back, could we see a steeper curve to fit reignited inflation? Finally, January will also bring Yellen's next funding announcement for the treasury.
Bloomberg - BMO Sees 10-Year Treasuries Retesting 5% With Volatile 2024 on Tap
Steno Research - Bull Steepening Watch - Is lower yields really what risk assets?
Capital Flows and Asset Markets by
- HAS INFLATION BEEN CONQUERED?- - Friday Speedrun... "If you believe the Fed Pivot is inflationary, you should be selling bonds aggressively here"
but 2024 is scheduled to be the year of cuts...
Source: BofA via The Daily Chartbook
As equities soar, there are issues hiding in plain sight
1. Oil = is not indicating a soft landing is approaching the global economy
The monetary policy piping is under pressure / SOFR
Bloomberg - Treasury Bond Rally Masks Repo Unease About Fed QT and Reserve Scarcity - Bloomberg
Bloomberg - Repo-Market Spikes Conjure Memories of September 2019 US Funding Turmoil
but there is of course the magnetic pull to all-time highs ...
have been highlighting the 90.90% likelihood of a new high printing after the recent bear market decline... (Nautilus Research - The "Magnetic" Attraction of Prior All Time Highs)However, should we not be hunting for some hedges, why wait for the January sales to spend some money on some portfolio protection?
MacroVisor (Charts of the Week) - "NASDAQ volatility has hit lows that we have not seen in years. As a result, downside hedges are quite attractive at the index level, particularly in QQQ where call skew is also quite elevated. Making 3M out ATM puts even more attractive in comparison as a portfolio risk hedging vehicle."
Top 10 Reads of the Week on Harkster.com:
Adam Mancini - *7 Green Weeks In A Row* For SPX, Red Week Now? Dec 18 Plan
Medium - AI-pocalypse Now by Matt Barrie
The Last Bear Standing - The Story of 2023
Steno Research - Portfolio Watch: Liquidity the name of the Game
SCMP - Is China’s economic recovery still making headway? 6 takeaways from November’s data
The Next Economy by
- The Wall of MoneyThe Lead-Lag Report - What Could Tightening By The Bank of Japan Look Like?
The majority of these links appear in our new "HarksterPro - Intraday Market Colour" channel. If you click on "Select Channels", you should find under "Added Recently" our latest additions to the app. @HarksterHQ will use this new channel to flag good articles/sources of content as well as headlines/market moving events.
Top 5 Podcasts of the Week:
Grant's Interest Rate Observer - A Currency Affair with special guest Brent Donnelly.
The MacroVisor Podcast - Mission Accomplished?
The Market Huddle - As Dovish As it Gets (guest: Edward Harrison)
Unchained - Laura Shin and Raoul Pal: What a Spot Bitcoin ETF Means for Bitcoin Prices
JPM - EM Fixed Income Focus: Only one turtle dove is needed for EM assets
The Week Ahead
Looking forward to next week...
Next Friday's Core PCE becomes an all-important number. JPow hinted that it would come in close to 3.1%, if it is hotter than expected than Williams comments have more weight. Furthermore, will the BoJ surprise and go early?
Nomura Podcast - The Week Ahead - BoJ Meeting, UK CPI and US PCE Deflator
Scotiabank - The Global Week Ahead: Walking It Back
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