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David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    Powell Says Policy Appropriate With No Bias to Hike or Cut

    This article by Christopher Condon and Steve Matthews for Bloomberg may be of interest to subscribers. Here is a section:

    The committee repeated language from its previous meeting, saying it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,’’ according to a statement Wednesday following a two-day gathering in Washington.

    The unanimous 10-0 decision left the target range for the benchmark federal funds rate at 2.25 percent to 2.5 percent.

    The Fed’s emphasis on subdued inflation prompted knee-jerk buying of government debt as traders added to positioning for a rate cut. However, that initial rally reversed on Powell’s comments on appropriate policy and transient inflation.

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    Instability at the Fed

    Thanks to a subscriber for this report by Daniel Oliver for Myrmikan Research may be of interest to subscribers. Here is a section:

    Credit Bubble Dynamics: The Bursting of an Historic Bubble

    Thanks to a subscriber for this report by Doug Noland, formerly of Prudent Bear, not at McAlvany. Here is a section:

    Italy Raises Deficit Target, Risking Fresh Conflict With The EU

    This article by Chiara Albanese, John Follain and Lorenzo Totaro for Bloomberg may be of interest to subscribers. Here is a section:

    The wider deficit forecast could revive tensions with the Commission after months of wrestling at the end of 2018 which resulted in a promise from Italy to stick to a deficit of 2.04 percent of GDP. With growth lower than expected, the money to keep the promise isn’t forthcoming. Nor is the government keen on measures that would dampen growth, with Finance Minister Giovanni Triastating recently that restrictive fiscal moves would be “absurd.”

    Italy stocks extended losses after the report, with the FTSE Mib index down 0.4 percent at 3.00 p.m. in Milan. The spread between Italian and German 10-year bonds widened by 4 basis points.

    "The deficit is the most thorny issue for Italy and could spark tensions with the European Union," said Vincenzo Longo, an analyst of IG Markets in Milan. "We are expecting negative growth in the first part of the year and the numbers the government is going to debate seem too optimistic. The government isn’t likely to push the issue however until after the European vote in May."

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    Big-Data Infusion for CPI Starts With Apparel

    This research note by Jeff Kearns for Bloomberg may be of interest to subscribers. Here is a section: 

    The BLS change may add volatility in clothing prices, but the impact on the main index will be relatively small, subtracting maybe 0.1 percentage point from the annual CPI rate, according to Michelle Girard, chief U.S. economist for NatWest Markets Securities and the most accurate CPI forecaster in Bloomberg’s latest ranking.

    “While, theoretically, this shift should not introduce a downward or upward bias in the data, we believe that prices captured using actual transactions data are more likely to be biased lower,” Girard wrote in a report. “Transactions data could capture lower price points from a flash sale that a data collector may not have observed.”

    Goldman Sachs Group economist Spencer Hill estimates the change could reduce core inflation in March by around 0.05 ppt from the monthly change. Omair Sharif, senior U.S. economist at Societe Generale, also sees a possible drag from apparel. The BLS plans to collect more alternative data directly from companies, an avenue that could ultimately account for almost 32% the index, Konny and her colleagues outlined in a February paper. Examples include scraping fuel prices from the GasBuddy website.

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    Gold: Ringing the bell

    Thanks to a subscriber for this note from UBS which may be of interest. Here is a section:

    The debate over Modern Monetary Theory

    Thanks to a subscriber for this report from UBS which may be of interest. Here is a section:

    Beware Misreading Inverting Yield Curve

    This article by Mohamed A. El-Erian for Bloomberg may be of interest to subscribers. Here is a section:

    “The extraordinary abrupt end to central bank hiking cycle + Fed paranoia of credit event is uber-bullish credit & uber-bearish volatility,” strategists including Michael Hartnett wrote.

    While negative yields on paper suggest that investors lose money just by holding the obligations, bond buyers could also be looking at price gains if growth stalls and inflation stays low. But along the way, risk assets may be entering the danger zone.

    “We’ve never seen monetary easing so long, so broad, so big,” said Brian Singer, head of dynamic allocation strategies at William Blair, a Chicago-based fund manager that oversees $70 billion overall. “What’s happened after every significant period of accommodation is a reckoning. This time the bubble is lower-rated credit and illiquid private assets.”

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    Investment Strategy: 'Trading Sardines?'

    Thanks to a subscriber for this note from Jeffrey Saut who I had the pleasure of meeting at the American Association of Professional Technical Analysts's (AAPTA) conference on Friday. Here is a section:

    "When investors hear yield curve inversion, they automatically think 'recession.' That’s because every recession since 1962 has been preceded by an inversion. But, not every inversion has been followed by a recession, so keep that in mind."

    Myth number two is that we are into the late part of the business cycle. If that is true why are the late cycle stocks acting so poorly? I have argued that the economic downturn was so severe, and the recovery so muted, that what we have done is elongate the mid-cycle. This implies there is much more time until the mid-cycle ends and the late cycle begins.

    Myth number three has it that earnings are going to fall off a cliff. I do not believe it. Certainly earnings momentum has slowed, but earnings continue to look pretty good to me. And, if the earnings estimates for the S&P 500 are anywhere near the mark, the SPX is trading at 16.3x this year’s earnings and 15.5x the 2020 estimate. I think with 2Q19 earnings myth number three will evaporate.

    As for Friday’s stock market action, readers of these missives should have found last week’s action as no surprise. I have talked about the negative “polarity flip” that was due to arrive last week for a few weeks. How deep the pullback/pause will be is unknowable, but I have stated I do not think it will be much. It was not only the economic data, and PMIs, that sacked stocks, but as I have repeatedly stated it was also the Mueller Report. The result left the senior index lower by ~460 points and the S&P 500 (SPX/2800.71) resting at the lower end of my support zone of 2800 – 2830.

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