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rates are rising
Yesterday’s initial jobless claims figures came in lower than expected, indicating a strong labor market that is another “good news is bad news” signpost.
We can see some of these developments through the Eurodollar futures curve, where the market’s expected federal funds rate is accelerating (more rate hikes), now expected to exceed 4% in the second half of 2023. This is in line with the Federal Reserve. His own estimates that he has given to the market:
The S&P 500 index is now facing its fifth consecutive daily red candle and sits below some key technical areas that acted as support.
After months of compression, volatility is also rising with the VIX climbing higher to a 1-month high volatility in bitcoin, equity and treasury bond futures.
As we enter another long holiday weekend, it has been an eventful day with market weakness and increasing selling pressure across multiple asset classes. Some of the most significant moves were the continued DXY strength as major market currencies continued bleeding against the US dollar and increased sovereign debt yields with the US 10-year high of over 3.25%. Yields are also increasing in major European economies (Germany, Italy, Spain and Greece).
The argument of “rates are peaking” has so far been a false or, at least, early call, as the markets have withdrawn their consensus expectations for the Federal Reserve’s early 2023 deadline to halt or pivot. . The thesis of a deflationary bust and accelerated fall back on the 2% inflation target continues as several members of the Federal Reserve Board are publicly emphasizing the need to reduce inflation at all costs on media shows such as tours, acknowledging that that the main problems are not over. Jerome Powell’s Jackson Hole speech and Neil Kashkari’s recent Oddlots appearance are clear examples.
inflation bear market
The 2008 comparison is misguided due to the differing inflation outlook and macroeconomic background.
2008 was a credit-financed boom that became a deflationary bust. 2022 is an inflationary bear market, where both equities and bonds have sold out. Most legacy financial and portfolio allocation is built on the assumption that bonds and stocks will not correlate positively to downside, and portfolio managers will “diversify” accordingly.
Equities and bonds have been positively correlated during the previous year period, where equity went down, This is a first for the post-fiat currency era of quantitative easing.
The positive correlation with the downside happened again yesterday, largely as the bonds were smoking up on the downside. US Treasury bond futures are at -1.99% at the time of writing for an asset that traded with a volatility of 15.54% over the past month.