Discussion
Watching the market today from off the desk, so some observations from my phone.
Equities up on the excuse of a 10 bps miss on YoY Core PCE. Reality is it’s the flows, not inflation - EOM/BOM and “vanna and charm” flows.
The Fed continues to remain the most important factor to get right. Had they not re-hawked the last two weeks (i.e. they hadn’t opened the door to more than two hikes) and data surprised to the upside like it has, then this SPX rally would likely have legs into Q3. But the re-hawking matters. The fundamental basis for this rally is the “resilient” economy, but we now know that economic resilience is met with more tightening, which is decisively negative for risk assets.
As I type the 3y/10y UST curve is almost 118%. Had the PCE inflation news truly been dovish, the curve would be steepening, not inverting further.
As discussed yesterday, the set-up is here for Financial Crisis 3.0, and it could and is likely to happen in the blink of an eye. The financial system has shown over the LTM that it cannot handle a 4-5% UST 10y note and a 3y/10y curve this inverted. So yes, bulls can cheer on economic resilience all they want, but because that’s met with more tightening, the risk of another “event” just continues to rise.
Exhibits
3y/10y UST curve almost 118%. Very inverted and no bueno for risk assets as we head into Q3.
SPX is at new bear market highs, yet HY CDX continues to carve out a decisive negative divergence, confirming the topping process underway.
“Vanna and charm” flows likely to continue until July 19…
…But Financial Crisis 3.0 is brewing.