In the last few weeks we have been allowing for, even anticipating a renewed bout of inflation concerns as the yield curve (10-2) steepens, nominal yields had dropped significantly to support and now finally CME traders lunge to the ‘no cut’ view for the March FOMC. Furthermore, I don’t trust CME not to be reactionary again going forward (they are not a reliable forward indicator).
So we anticipated a bounce in inflation signaling, but also the potential for the inflation trades to bounce. But what is happening is what has been happening since early 2022. Everybody – man and machine – is in line and fully submissive to the Fed and its renewed hawkish demeanor while inflation signals like Employment/Wages bump up. I have thought that when the yield curve un-inverts, signaling that the Fed is falling behind the curve (literally and figuratively) the inflation trade may benefit.
But the curve has not yet un-inverted yet. So there’s that. It is not time yet from that perspective. Also, there is no rule that the minute it ticks above zero the inflation trades – probably led by the precious metals – will get going. Ironically, I think this increases the odds of an interim deflationary event as the curve steepens (assuming it steepens, as expected).
What is happening now is what has been happening for the most part for over a year. Goldilocks. That would be Tech, Growth and things that are generally not inflation sensitive, cyclical or anti-USD in character. In other words, the 2023 story continues for now. I’ll plan to make some adjustments to the portfolio, which is blessedly mainly cash. The benefit of this cycle over the Bernanke ZIRP years, for example, is that cash is paying you to be patient. Patient I will be.
Ironically, but true to the form of the last year+, inflation is signaled and so the inflation assets DO NOT benefit because of implied submission to the POWER of the monetary regulator trying to adjust interest rates to stop inflation. Just as ironically, Goldilocks is outperforming* due to this fear and submission even though her porridge is ‘too hot’. It’s a result in the implied confidence (in this case another word for fear or forced respect) that the mainstream have for the Fed. ‘The Fed means business!’ thinks the average person. Add in the political contention and whatever behind the scenes manip they are employing and you have a…
Tough market. A lot of irony noted above. Stay intact now, capitalize later.
* More accurately, Goldilocks SIGNALING is outperforming in a very thin stock market obsessed with Nvidia, my dear departed SMCI and other AI stuff along with a very few giant Tech captains and the brighter lights in the Semiconductor sector. The stock market is back on a ‘bad breadth’ trend.
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