If inflation evolves like 2024, can cut some time this year
Cautions that uncertainty must not paralyze monetary policy
… “If this wintertime lull in progress is temporary, as it was last year, then further policy easing will be appropriate,” Waller said in remarks he’s scheduled to deliver on Tuesday in Sydney. “But until that is clear, I favor holding the policy rate steady.” …
… but wait, there was more. Mickey said …
Bloomberg: Fed’s Bowman Sees ‘Troubling Trend’ of Bank Oversight Inaction
…Monetary Policy Bowman also touched on monetary policy in her remarks and said it “is now in a good place.” She said while core measures of inflation are elevated, she expects the rate of price changes to moderate further this year.
Bowman cited “upside risks” and noted that progress back to the 2% target has been “slow and uneven.” The core consumer price index remained elevated in January, rising 3.3% for the year.
“Having entered a new phase in the process of moving the federal funds rate toward a more neutral policy stance, there are a few considerations that lead me to prefer a cautious and gradual approach,” she said. “Given the current policy stance, I think that easier financial conditions from higher equity prices over the past year may have slowed progress on disinflation.”
… So, cautious and gradual = rate CUTS? Askin’ for a friend … and for a reminder of who’s who on the FOMC, see Wells Fargos FOMC 101 annotated HERE … and as that saying goes, ALL views and OPINIONS are created equally. SOME opinions are just created MORE equally than others …
This in mind and on heels of a longer-term annotated look at 10yy dating back 235yr, well, I kinda hesitate to have any sorta look at rates in whatever sort of historical context. Long OR short-term. THIS visual strikes me with ONE conclusion — the more things have changed, the more they have stayed the same (avg 4.40% over 235y) makes the following visual, well … kinda meaningless … and yet, here I go …
10yy: 50dMA (4.53) support coming back into view, TLINE (4.60%) next while recent lows (and LONG-term avg) 4.40% remain resistance…
… meanwhile, as indecision prevails into a quiet week on the calendar, momentum (stochastics) offering very little impulse …
… here is a snapshot OF USTs as of 709s:
… for somewhat MORE of the news you might be able to use … a few more curated links for your dining and dancing pleasure …
NEWSQUAWK: US Market Open: US equity futures firmer, crude and gold remain underpinned by geopolitics, despite a firmer USD … USTs are slightly softer. Action which comes as cash plays catch up to yesterday’s action and as such yields are firmer across the curve, steepening and outperforming European peers. Thus far, USTs down to a 109-01 trough which is comfortably clear of Monday’s 108-26 base. Ahead, Fed speak from Barr and Daly; attention also on the Russia-US meeting in Saudi.
Opening Bell Daily: Investors love pricey stocks … Inflation and tariffs haven't stopped investors from piling into historically pricey stocks … The S&P 500 is breaking records despite rising uncertainty across the board.
…What’s more, the index’s CAPE ratio — which compares current prices to the last decade of earnings — sits at 38, meaning today’s market is more expensive than it has been 95% of the time since 1957.
Finviz (for everything else I might have overlooked …)
Moving from some of the news to some of THE VIEWS you might be able to use… here’s some of what Global Wall St is sayin’ …
Bonds. Stocks. VOL. Oh my …
BARCAP: U.S. Equity Strategy: Changing of the Guard: Yields, Equities and Volatility
Post-ZIRP regime shift leaves equities negatively correlated to Treasury yields despite UST 10Y remaining below 5%. Our updated analysis points to higher inflation and lower equity volatility as the drivers. Returning to positive correlation may come at the cost of an equity vol shock.
…Is 5% still the right level to watch? In our prior work, we've shown that nominal 10Y yields rising above 5% is generally when the yield/equity correlation flips to negative (i.e. rising treasury yields and falling equities). Below this level, the yield/equity correlation tends to be positive. This is shown in Figure 2, where we see that the one-year rolling correlation gradually became more negative as 10Y yields increased above 5% in the 1960s, and then gradually turned positive as 10Y yields decreased below 5% in the late 1990s.
Figure 3 shows a scatter plot of these two variables and we can clearly see that, historically, the yield/equity correlation has strong negative (albeit non-linear) dependence on the level of 10Y Treasury yields, with the level of ~5% being a critical turning point.
However, something changed around mid-2018 and the yield-equity correlation appears to have turned negative at a much lower threshold of ~3% UST 10Y over the last several years…
… since 2018, it appears that the negative relationship between SPX P/E and nominal Treasury yields came into play when UST 10Y was much lower than the 5% critical point …
This is concerning with regards to heightened equity price sensitivity to short-term fluctuations in nominal yields, as evidenced by negative 1m rolling one-month yield/equity correlation during most of the last 3 years.
…Figure 6. Equities have been especially reactive to fluctuations in UST 10Y yields over the last 3 years
We close our paid February RBA trade idea at 4.09% for a loss of 2.7bp (USD54k). We had initiated the idea on 29 January (see Australia rates: Move May RBA payer to February payer), as risk reward was attractive.
The Reserve Bank of Australia delivered a rate cut on Tuesday, reducing the cash rate to 4.10% from 4.35%, citing progress on inflation. The cut was hawkish, however, with Governor Michelle Bullock signaling that further cuts are not likely in the near term and that the cut in February was intended to slightly reduce policy restrictiveness.
We’re always and forever about analogies especially trying to say this or that year is like this or that OTHER year. This next note tackles some previous DJT 2016 trades and analogies …
DB: Mapping Markets: Why haven’t the 2016 “Trump trades” worked this time?
A common question being asked is why the so-called “Trump trades” of 2016 aren’t working this time. After all, the S&P 500 has been broadly range-bound since election day, we haven’t seen the big spike in long-end yields that happened 8 years ago, and even the dollar’s rally has unwound somewhat. Moreover, that’s happened despite Trump’s policies being directionally similar to last time, including tax cuts, deregulation and higher tariffs.
So why’s the 2016 playbook not working again? First, Trump’s victory was more priced in for the 2024 election, so it wasn’t as big a surprise and markets were already accounting for it to a larger extent. Second, the financial context is very different, as today we have stronger inflation, more restrictive monetary policy, and higher asset valuations. And third, the policy announcements from the Trump administration have taken place on a much faster timeline, including an immediate push towards tariffs, unlike the first term where the trade war didn’t begin until 2018. So that's led to more immediate uncertainty and volatility in markets.
… same shop with a morning note and an excerpt on RBAs hawkish CUT (?) …
… Elsewhere, the Nikkei (+0.53%) and the KOSPI (+0.57%) are higher but the S&P/ASX 200 (-0.66%) is extending its previous session losses following a hawkish RBA statement and press conference after their 25bps cut this morning.
This was the RBA's first rate cut since 2020, with the bank citing some progress towards bringing down inflation, but warning that further monetary easing still hinged on more downside in inflation. The central bank flagged that it would retain a restrictive policy due to the strength of the jobs market and an uncertain global economic outlook. Following the decision, the Aussie (-0.04%) briefly climbed before paring gains, trading fairly flat at 0.6352 against the dollar while yields on the policy sensitive three-year government bond have increased +5.5bps to trade at 3.93% as we go to print…
Trade. It’s what’s for dinner…and in this next case, introduces DOWNSIDE RISKS and so, Team Rate CUTS leaning in …
The downside risks to our forecasts could dominate the upside ones.
Tariffs continue to dominate headlines, among other policy surprises. The prospect of reciprocal tariffs is yet one more risk to our baseline forecast for the year. We have consistently said that the inflationary risk for tariffs gets its due attention in markets, but that the adverse growth implications are an underappreciated risk. As Friday’s retail sales data show, there are downside risks everywhere, and we think there is a downside skew. But we and many other forecasters were surprised to the upside in 2023 and 2024, so first, we should ask if there are upside risks we are missing.
The most obvious upside risk to growth is a gain in productivity, and frequent readers of Morgan Stanley research will know we are bullish on AI. Indeed, the level of productivity is higher than pre-Covid levels, and some tentative estimates could point to faster growth as well. A cyclically tight labor market no doubt contributes, and there could be some measurement error. But gains from AI do appear to be happening faster than in prior tech cycles, so we can rule little out. In our year ahead outlook we penciled in about a tenth percentage point extra productivity growth this year from AI. And there is a slightly large boost to GDP from AI capex spending…
…So, while we could be wrong to the upside, I still see a lot more unappreciated risk to the downside. Our baseline view on tariffs has been that tariffs on China will ramp up substantially over the year, while other tariffs will either not happen or be fleeting, part of negotiations. News flow so far does not reject our baseline, but the risk of broad, reciprocal tariffs has clearly risen.
But even in our baseline, we think the growth effects are underestimated. Roughly 2/3 of imports from China are capital goods or inputs into US manufacturing. The tariffs imposed before led to a sharp deterioration in industrial production. That slump went through 2H2018 through 2019 and was a drag on the broader economy. As important, there was not a subsequent resurgence in industrial output. Part of the undergraduate textbook argument for tariffs is to have more produced in the home country. That channel works in a two-economy model, but less so in the real world.
The prospect of reciprocal tariffs broadens the downside risk. Free trade divided production functions around the world but driven large trade imbalances – and it is precisely these imbalances that are at the center of the new administration’s focus on tariffs. China, Canada, and Mexico standout for their imbalances with the US, though the driving forces are varied. More importantly, those imbalances built over decades, so undoing them quickly will be very disruptive, at least in the short run.
But the prospect of reciprocity globally forces a wider lens. For Latin America and Asia, key economies have higher tariffs applied to US goods than vice versa. Our Asia economics team highlighted that the greatest risks are to India, Thailand and Korea who have, on average, 4%-6% higher tariffs for US products. Ironically, Vietnam and Indonesia have lower tariffs and reciprocity would imply lowering tariffs to those countries, though it is not clear that the US lower tariffs given given the trade deficit with Vietnam. In Latin America, our local economics team highlights that all major LatAm countries have higher tariffs. Ultimately, we are retaining our baseline that only tariffs on China will prove durable, and the delayed implementation is consistent with that view. But the risks are clear.
Finally, Swiss weigh on on the news which will air later on tonight (?) …
…A television interview with US President Trump and Trump megadonor Musk is scheduled tonight. Investors will be interested in the balance of power. Federal government job cuts have attracted attention. Non-post office civilian federal employees are less than 1.5% of the US workforce, limiting the direct economic impact. There may be damage to supply chains, impacting private sector businesses.
… And from the Global Wall Street inbox TO the intertubes, a few curated links …
Latest (‘ish) from the world of shipping and specifically, CASS Info Systems …
The shipments component of the Cass Freight Index continued to tumble in January, down 5.3% m/m. About half of the decline was normal seasonality, and part was likely worse weather than normal, and unusually in the Southeast.
On a y/y basis, shipments declined 8.2% in January.
In seasonally adjusted (SA) terms, the index fell 2.7% m/m, extending a 3.1% decline in December, to the lowest level since July 2020.
Private fleet capacity additions continue to pull freight from the for-hire market, and LTL consolidation is also putting pressure on this index.
The normal seasonal pattern would have the index down about 10% y/y in February, but it should be smaller if milder weather continues. Some national fleets that experienced similar declines, like XPO, attributed about 3pps to weather.
After rising 13% in 2021 and 0.6% in 2022, the index declined 5.5% in 2023 and 4.1% in 2024, and so far is trending toward another decline in 2025.
… Team Rate CUTs most definitely watching as the moving of goods from hither to yonder is apparently slowing, there’s got to be some sort of ‘tell’ or message TO the markets, no?
So we got 1) lower USD 2) lower oil, or at least less geopolitical premium then 3) a Fed that insist on signalling cuts.. so lower rates? Are the stars aligned? Although arguably could be like prior years when beginning of the year evolved very differently 6m later
So we got 1) lower USD 2) lower oil, or at least less geopolitical premium then 3) a Fed that insist on signalling cuts.. so lower rates? Are the stars aligned? Although arguably could be like prior years when beginning of the year evolved very differently 6m later