The tide is turning and most people don’t see it

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Let’s talk about why the US Federal Reserve is going to move away from its policy on its timeline, not the market timeline, because I still believe there is an opportunity to be long or short on any market or title priced for an early shift.

I say this as the Overnight Index Swap (OIS) market estimates that the Fed’s chances of embarking on its rate hike cycle by the end of 2022 at almost 70% by the end of 2022, which is more than one year before what was announced by the central. Bank.

It’s going to take a long time for the Fed to sift through all the noise in the data

First, when you take a look at the Fed’s GDP forecast for the full year and then plot the consensus view on second and third quarter growth sequentially, it seems to me that the Fed is in between zero and two percent for the fourth trimester, and that’s not a chance he’s moving with a growth relapse of that degree. The consensus is 5% growth for the fourth quarter, so this is where the sweet spot for downgrades will be, if not before.


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Second, when it comes to “transitional,” the Fed talks about years, not quarters or months and bond vigilantes haven’t figured it out yet. It will take a long time for the Fed to sift through all the data noise, and certainly not until September, to see how much the fiscal pullback is influencing domestic demand and, of course, how much we are seeing an increase in demand. participation rate in the labor market and a relaxation of supply pressures that we see in the labor market, which remains heavily distorted by emergency unemployment benefits.

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Third, the first jobless claims contain a lot of clues about Fed policy, and while they are clearly improving, we need to keep in mind that at 458,000 for the four-week moving average, we are. at a level that was in the past more than three years for the Fed to make a change. We are at the same level as in September 2010, April 2002 and May 1991, and each time the markets got it wrong that the Fed was only a few months away from changing course. I don’t think it’s going to be any different this time around, especially for this Fed, which I feel will be very patient.

As for the economy, we are already seeing estimates for the second quarter going under the knife. A month ago, the Atlanta Fed’s Nowcast was 13.6% in the second quarter and is now at 10.3%. And Citigroup’s Economic Surprise Index returned to its level of last June, when the economy was in lockdown mode and we were five months away from vaccine announcements.


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This economy is already starting to show signs of fatigue even sooner than I expected and, again, a great opportunity to bet against the pro-cyclical view. I’m already seeing the quick money doing this, as the latest Trader Commitments report shows that speculative net copper long positions have declined for three consecutive weeks and are down 38% from the mid-peak. February – actually the lowest bullish positioning since August 2020. And watch the wood on the Chicago Merc: net is now short for each of the past two weeks. We haven’t seen this since the second half of May 2020.

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The tide is turning and most people don’t see it, which is absolutely wonderful if you’re like me and see this inflation, at least from the commodities sector, as a viable bet to go the other way.

I’ve also spent a lot of time analyzing the U.S. consumer spending and income numbers released last Friday for April and it’s clear to me that 20% of March’s stimulus has already been spent. If you remember, the New York Fed once told us that no more than 25% of those relief checks are actually spent, and we’re done four-fifths of it with no additional stimuli in sight. The savings rate fell sharply to 14.9% in April from 27.7% in March.


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We’ve done the work on this, and the post-pandemic break-even savings rate is 10%, whereas it was closer to 7% before the pandemic. The widely held opinion is that there is a ton of dry powder left here, but that ignores the fact that a lot will change after COVID-19, and one of them is a personal savings rate. high precautionary. Much of Uncle Sam’s money has already been spent pretty much – it’s probably a month or two longer to live and that’s it. The party is over.

The current situation is that we have several segments of the service industry moving from a time when there was no business and no pricing power to a situation where people would pay almost anything for one. drink at a bar, a movie at the theater or a game at the baseball stadium. For now, in a hungry cyclical consumer services market, price-demand elasticities have become very low and this is understandable under the current circumstances. But human behavior is such that this condition will not last that long. Plus, stimulus check income will run out very soon, so the ability to pay those higher prices is sure to wane.

Massive budget support has been the glue that held the economy together, and reopening’s contribution to growth is largely over. In the short term, there is no more budget support. The second half of the year will see the narrative shift away from inflation and into a period of downturn in the domestic economy.


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The demand boom is clearly fading. And markets underestimate how much demand has depleted, especially in the US $ 5,000 billion market for goods, which is 10 times the size of the consumer cyclical services market, where much from last year’s decline has already been recovered. We are closing this gap in the second quarter and I have no doubts that we are in a late 2002 growth relapse that will surprise a lot of people.

Remember: we had a huge bond selloff in the winter and spring of 2002, and the market shifted to a bullish view of post-9/11 rebuilding and rebuilding the economy and the market. Fed tightening. The Fed’s next two moves were to ease, and they didn’t start to tighten for two years. This is the comparison that I would make between the perception of the market and the reality that I see in the months to come.

I think the markets are now heading towards the final stage of the reopening trade discount; what happens next is the need to think about what life is like after reopening the trade is done. And with that in mind, I question the sustainability of the stimulus trade that has been the dominant trade, and now the overwhelming consensus, for most of the past six months.

Join me on Webcast with Dave June 15, when I welcome Lacy Hunt, Executive Vice President of Hoisington Investment Management. Learn more about my website.


In-depth reporting on The Logic’s innovation economy, presented in partnership with the Financial Post.


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