From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
It was only a month ago that we discussed the TIPS versus Treasuries ratio hitting its highest level since 2013 as investors prepared for rising inflation.
Fast-forward to today, and the inflationary backdrop looks very different.
Inflation breakeven and forward expectation rates have rolled over aggressively since the middle of November. This is illustrated by the TIP/IEF ratio, which recently undercut its May highs. Combine this action with the lack of follow-through on last week’s kick save from the 30-year yield, and the prospects of rates rising across the curve aren’t looking too hot.
But what does that mean for risk assets?
For starters, commodities will miss out on all the usual tailwinds that come with inflationary pressure. Let’s take a look at a chart that highlights that relationship.
On Monday night we held our December Monthly Conference Call, which Premium Members can access and rewatch here.
In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The recent risk-off action came to a head last week, with commodities, stocks, and interest rates all violating key support levels.
We saw a brief flight to safety, as long-term treasury bonds $TLT broke out to their highest level since early January.
Yes, money was flowing into bonds, which is not a good look for stocks and commodities.
Bottom line, there was a lot of damage done to the primary uptrend in a very short time. Market participants needed to come out and repair the damage ASAP.
In the handful of trading sessions since the selling stopped, bulls have managed to claw back much of the losses from last week.
Buyers needed to quickly step up to the plate. And that’s exactly what we’re seeing right now, as stocks and other risk assets are rebounding aggressively off the recent lows.
As for bonds, the breakout in TLT failed, and the 10-year and 30-year both snapped back above critical levels.
We held our December Monthly Strategy Session last night. Premium Members can click here to review the recording and the accompanying slides.
Non-members can get a quick recap of the call simply by reading this post each month.
By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is a valuable exercise, as it forces us to put aside the day-to-day noise and simply examine markets from a “big picture” point of view.
With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Treasury yield spreads are contracting.
Inflation has been the talk of the town in recent weeks. But, now that the Federal Reserve has finally joined the chorus, the market seems to be headed in a different direction. At least over the near term.
We’ve been closely monitoring long-duration rates for signs of further weakness. As we write, the 30-year is violating its summer lows, and the 10-year is testing a critical level of interest around 1.40%.
The bulls really need these levels to hold. If they don't, we’d better get used to the recent volatility--because it’s likely to get worse.
Welcome to our latest RPP Report, where we publish return tables for various asset classes and categories, along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the absolute and relative trends at play and preview some of the things we’re watching to profit in the weeks and months ahead.
We consider this our state of the union address, as we break down and reiterate both our tactical and structural outlook on various asset classes. Our ultimate goal is to discuss the most important themes and developments that are currently playing out in markets around the world.
There's been plenty of action these past few weeks. Let's kick things off with stocks and try to make sense of what we're seeing.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
You already know how we feel about the US Bond Market.
We like the short side when it comes to treasuries.
Lately, we’ve been keeping a close eye on the long end of the curve since it hasn’t kept pace with shorter-term yields. Though this is still the case, the 30-year yield has found support in recent weeks as rates continue to rise across the curve.
This should keep the bulls happy for now as an environment where long rates are making new lows is not supportive of higher prices for risk assets.
But that’s not what’s happening. We remain in a rising-rate environment and don’t see signs of that changing anytime soon. As long as this remains the case, we want to be selling bonds and betting on higher prices for risk assets.