Thursday 27, January 2022

Fed analysis

For my money, Alex Manzara is the best commentator on fixed income, “period” (as the Americans say). Macro Alf is pretty good, and there are a lot which are worth reading, but Manzara always leaves me feeling smarter.

Manzara’s latest post hits the nail on the head. He points out the danger of using unemployment as a measure of slack in the economy (not exactly an original idea). For me, the possibly profit opportunity is the fact that the Fed has signalled that it’s going to taper MBS purchases. It never made sense to me for the Fed to buy securities not issued by the US Treasury (and fairly short-dated ones at that), but it did, and this juiced credit and equity markets.

Now it’s all going into reverse, officially. Of course, the Fed has plenty of form for leading the market up the garden path. Mark Carney was the “unreliable boyfriend.” Powell is the serial bigamist. However, maaaaybe this time is different and tightening will not be reversed as soon as the equity market mumbles the safe word.

Wrap

Equity markets continue to be weak. US rates at the short end continue to rise. The 7-10 year section of the curve seems to be on the point of inverting. The dollar is very strong: $DXY now at over 97. Meme stocks and many profitless tech stocks are down heavily. $ARKK is down 40bp, but is down 33% year to date. The NDX is down by 1.4%. $AAPL, which reports today, might rescue it, but in a bearish market all news is bad news. Commodities continue to be strong, with nat. gas up an insane 40%.

The market really seems to be settling into a sustained trend. The Fed will have a huge battle on its hands to avoid backtracking.