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From Tantrum To Tolerance

By Stephen InnesMarket OverviewApr 09, 2021 04:18AM ET
From Tantrum To Tolerance
By Stephen Innes   |  Apr 09, 2021 04:18AM ET
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Equities are mixed to end the week with China underperforming in Asia on a stronger inflation print primarily on higher commodity prices which have raised worries that the PBoC may reign in credit. Vaccine rollout and reopening timelines remain in focus with Australia and the Philippines the latest Asian nations to limit the use of AstraZeneca (NASDAQ:AZN)'s vaccine following blood clot findings.All of which is providing poor eye candy for oil.

Broader macro indicators are mixed with USD higher, which is weighing on commodities along with Chinese PP and tightening fears while UST yields have retraced some of the last two days' gains with Fed's Powell and Bullard reiterating that they will not react to near-term inflation

It’s been a relatively dynamic week thanks to Chair Powell's dovish lathering as the market shifted from tantrum to tolerance. Indeed the market is increasingly more comfortable with growth driving up yields.

Still, there seems to be some mild pre-weekend profit-taking after China's inflation beats that rekindled some inflation concerns. After all, not just China is paying the inflation piper when it comes to higher commodity prices which were the largest impacting factor in the China prints.

And there might be more than meets the eye to the fall in yields after all; who is buying this stuff? The stabilisation and subsequent decline of US Treasury yields may well be connected to foreign central banks' activities. The Fed's latest custody data shows that after three consecutive weeks of heavy net selling, the official sector turned a small net buyer of Treasuries in the last week.

Still, earning season lies in wait, but whispers hinting that we are nowhere at the end of the upgrade cycle yet is keeping a good bid under the market. Strong operating leverage, a forceful rebound in consumer savings spending and fiscal stimulus provide the key pillars of the recovery and drive earnings. So there could be some basis for the markets recent bullish madness.


It's a bit Friday messy as traders can't sit on a trend longer than 48 hours these days, especially as FX has turned very transactional not to mention the air continues to leak out of the most popular reflation trades as vaccine rollout is fully priced. The infrastructure deal is likely a colossal buy the rumour/sell the fact.

USD/CNH continued to trade higher, likely on a combination of positioning - the latest Reuters positioning survey suggests the market has increased bets on long CNH - and outflows - there was interest in selling CNH against USD/HKD due to outflow from onshore investment. Hinting that CNH could remain weak against the basket

GBP remains under pressure with intermittent waves of supply against the USD, EUR and JPY.

Price action has been transactional over the course of the week, with exit velocity for the UK well priced and conversely underpriced for the EU, possibly leading to position adjustments amplifying the move at times and persistent tensions in Northern Ireland, perhaps another drag on sentiment.

It's a bit Friday messy as trader can't sit on a trend longer than 48 hours these days, especially as FX has turned very transactional these days as the air continues to leak out of the most popular reflation trades as vaccine rollout is fully priced. I GUARANTEE the infrastructure deal is a colossal buy the rumour/sell the fact trade.

There's still an outsized focus on infrastructure stimulus, particularly in terms of taxes. Democratic Senator Joe Manchin criticized budget reconciliation in a Washington Post op-ed. He highlighted concerns being used by both parties to stifle debate around major issues facing the country and said it should replace regular order in the Senate. Democrats have still been widely expected to use reconciliation to push legislation through. A compromise is likely to revolve around a ~25% corporate tax rate vs the 28% proposed by the White House.

I'm sticking to my framework since late February, which has been to ignore the idea of a monolithic USD trade and think of currencies I like to trading in three buckets:

1. Cyclicals (CAD, AUD, NZD, NOK)
2. Funders (CHF, JPY)
3. Weird ones that seem like idiosyncratic stories (EUR, GBP)

It’s a rates-driven FX market with equities and commodities playing a secondary but often still-important role. Note JPY and CHF are ripping, and the most cyclical currency (CAD) is underperforming even as US equities make new all-time highs daily. This says that rates are the clear driver in April, not stonks, so choose your poison wisely

NY Fed To Buy More 20y & Less TIPS

The US 20y Treasury yield outperformed into Thursday's close. At the same time, 10 TIPS saw marked weakness after a speech from New York Fed's SOMA manager Lorie Logan indicated a technical twist in asset purchases favouring 20y and away from TIPS. Logan noted the Treasury Department had altered its supply mix over the period of the pandemic. It had reintroduced 20-year auctions but reduced the relative supply of TIPS compared to conventional bonds. Hence, looking at Treasuries outstanding, there was a growing amount around the 20-year sector and a relative shrinking in TIPS. She said since the Fed makes its asset purchases roughly proportional to outstanding Treasury, "we plan to make minor technical adjustments to our purchase sectors".

She added that the New York Fed also planned to increase the frequency it made such updates. The implication is that the NY Fed will step up purchases of 20y and step down purchases of TIPS to maintain its relatively.

The 20-year yield dropped 4bp on her remarks, and the 10/20 spread narrowed 3bp, continuing to tighten another 1bp. The 10-year TIPS yield added 3bp. This also caused a sharp drop in the 10-year breakeven. Nothing at all to do with inflation, but entirely a consequence of the Fed's influence on TIPS

Wink wink inflation expectations aren't as high as the market might suggest.!!!

The BIS' latest Quarterly Review examined "What drove the recent increase in the US inflation break-even rate?" and concluded that through 2020, much of the gain had been about reflation. It said, "in a simple textbook setting, the inflation risk premium would only reflect the compensation that investors demand holding nominal Treasuries, over and above the compensation for expected inflation."

However, it also found Treasury supply dynamics had influenced breakevens. The BIS observed that the Fed's asset purchase program bought the same amount of conventional Treasuries and TIPS even though the Treasury had issued far more conventional bonds than TIPS.

From Tantrum To Tolerance

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From Tantrum To Tolerance

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