What Do Credit Spreads Tell Us?There are two types of economic indicators which are often cited in the financial media: (i) those which lag; and (ii) those which are leading. The latter of more useful. One of the best real-time leading indicators are credit spreads. These are excellent indicator of the 'health' of the financial system. So what do they tell us today with interest rates sharply higher?
Soft Landing HopesMarkets have been largely range trading for 17 consecutive weeks. For example, the S&P 500 appears caught between 3800 and 4200. And I think it's easy to explain: there are valid cases for both the bullish and bearish case. Equally however, there is also no compelling argument to suggest markets are set to explode higher or crash. This market requires patience. What's more, you cannot afford to be too aggressive betting on either outcome.
10-Year Yields Continue to Rise… Why this MattersThe bond market has connected the dots - rates are likely to stay higher for a lot longer. This has seen yields all along the curve surge... with the 10-year now back above 4.0%. The 2-year has moved 100 bps in just 4 weeks. This has implications for stocks and their valuations... none of it great. Look for the 10-year to push higher - perhaps to 4.4% - which represents opportunity for investors.
Fed’s 2% Inflation Goal: A Long, Slow Fight Another month, another hotter than expected inflation report. This time it was one which the Fed focus on: "Core PCE". Expectations were for 4.3% YoY - it came at white-hot 4.7%. Where is the problem? Simple... services. And until we see unemployment tick higher... core services inflation will remain sticky. The Fed has a long fight on its hands... and the market is only recently connecting those dots
Equities Often Slow to Connect the DotsLast week I warned the market was poised for a sharp pullback. This week we got it. In short, both fundamentally and technically the market felt vulnerable. Market multiples pushed 19x forward on little substance. And from there, it did not take much for the bulls to lose their nerve...
Managing Risk During ‘FOMO’There are three important facets to the game of speculating required to make you consistently profitable: (1) understanding your psychology and emotions; (2) a deep understanding of how to manage your risk profile; and (3) access to a wide array of strategies that suit any range of market conditions. Today I think the first of these could be costing a lot of people money... in this case the "fear of missing out". This is a dangerous mindset which 'infects' a lot of speculators... don't let it be you.
Why a Rising US 10-Yr Yield Presents OpportunityBond yields are once again starting to rally. Rates are likely to be higher for longer. The US 10-year is now pressing 3.80% - and likely to exceed 4.0% in the coming weeks. The question is how how far will it go? My view is it will unlikely stay above 4.40% for any sustained period. And if anything - will resume it's downtrend in 2024 as we approach recession. That represents an opportunity for investors - here is how I am trading it.
Bonds Realign with the Fed… Not EquitiesFrom the first week of 2023 - bond markets were at odds with the Fed. For example, yields on the 2-year treasury plunged from 4.50% to barely above 4.0% over the past 6 weeks. And yet - the Fed were resolute in their resolve to keep raising rates. Something was amiss. Turns out that bond markets have pivoted and now see 'eye-to-eye' with the Fed that rates are staying higher for longer. Go figure. However, equities are yet to get the memo.... that's risky.
S&P 500: ‘False Break’ Warns of PullbackThis week the S&P 500 performed a 'false break' of its previous 4100 high. Technicians see this as a reliable reversal signal. However, on the other hand, there are bullish arguments we can make. The mix of bullish and bearish technical signals make shorter-term 'tactical' trading very difficult (that's not my game). Here's how I'm thinking about it...
Bonds React to “Higher for Longer“Bond markets (and the US dollar) appear to be reacting to the likelihood the Fed has 'more work to do' on bringing inflation down to its 2.0% target. For e.g., the US 2-year treasury has surged almost 50 bps the past couple of weeks on stronger than expected economic data (eg surging jobs and higher wages). Meanwhile, JP Morgan's CEO - Jamie Dimon - said it's too early to declare victory on inflation. What does this mean for stocks?
