After a week start for the new year, the second week saw equity recovering lost ground and making a new high YTD:
1 market started the week strong out of gate with leadship from tech. Two reasons seem to be floating around: Dallas Fed Lorie Logan spoke on Saturday which mentioned Fed should be concerned about rapid RRP drawdown and start to think about slowing down QT. Based on LL's speeach, BofA team predicted Fed will (a) start cutting rate, AND (b) start tapering QT in March FOMC. Second, new AI stuff out of CES.
2 the latter part of the week saw warm CPI (Thur) and cold PPI (Fri). Market initally sold off post CPI and then rallied after realizing components contributing to Fed's favorite inflation measure (core PCE; to be released on 01/26) stayed cold to lukewarm. PPI on Fri was just plain cold. Lower consumer price implies earlier and faster cutting from Fed and good for equity market.
3 Yield curve bull steepened massively (2Y yld down 26 bps from 4.40 to 4.14; 10Y down 6 bps from 4.05 to 3.96; 30Y down 1 bps from 4.21 to 4.20). Market now priced in almost 173 bps of rate cut in 2024, which is SEVEN 25 bps cuts in 2024 (Jan FOMC hold; March cut with 80%+ probability; one cut for every meeting for the rest of the year). Very unusual to see lack of response in the backend given that massive 2Y movement. Bill Gross and Jeff Gundlach both very happy for yield steepening trade. Others are either squeezed massively or trying hard to hop on the same ride.
4 Other markets: FOREX was not buying the lower rate story (USD did not sell off); GOLD believed and rallied on Fri; Bitcoin sold off on the final approval of spot etfs (buy on rumor and sell on news); Crude oil response to joint attack against Yemen was quite mild. As long as Iran does not get in, it is not a big deal. Get Suez Canal shipping lane reopen will prevent inflation spike up down the road.
===== Next week (01/16-01/19) =======
1 Shortened VIX expiration (Wed) and OPEX (Fri) week (Monday is MLK day) has little macro / econ news release. Just Weds retail sales (to judge consumer spending power) and the usual weekly claim on Thursday (earlier and timely indication of labor market strength). Will OPEX finally lead to market makers losing their firm gamma grip on the index (Vanna and Charm leaving on Weds 01/16) and market starting to make outsized downside moves? Bigger events will be at month end (Jan Fed FOMC 1/29; QRA annoucement 01/31).
2 Fed Waller speech on Tuesday will be significant after these huge moves on the front end of the yield curve. Recall Waller's speech back in early Nov 2023 (real rate too high and fed should start cutting) started the whole bond and equity rally for the final two months of 2023. Will he push back against market pricing of 7 cuts in 2024?
=========== Big picture ============
Reminder: 過去的15年隻是一個”massive QE + Deficit Spending cycle“ 的前半程而已
https://bbs.wenxuecity.com/tzlc/1770663.html
and resolution of the cycle + fiscal (massive deficit financing) and monetary experiment (QE+ZIRP) will be messy. Election year bribery money and yield curve manipulation by Treasury will only slow the process.
A good memo worth reading / listening from a seasoned veteran on where we are in the macro econ cycle:
https://www.oaktreecapital.com/insights/memo-podcast/easy-money
Just my 2c
