Discussion
In the March 28 WOTE Report I rated the tactical 8-week outlook as neutral, as summarized below.
But in the wake of yesterday’s above-expectations ISM manufacturing data1 and the continued move up in crude oil2, the long end of the UST market has taken notice and SPX has dropped down to its 20dma.
Tactical Rating Update
As a result of the drop in SPOOZ down to the key 20dma level effectively de-risking the Index ahead of Friday’s NFP report and next Wednesday’s (April 10) CPI report, combined with confirmation of said de-risking from the lackluster bid in the CDX market and defensive equity sectors, I am upgrading the tactical 8-week outlook to bullish.
IG CDX is 10 bps below where it was last time UST 30s were here.
Defensive equity sectors barely showing signs of concern.
This upgrade will obviously seem ‘quick’ against the backdrop of an equity market not even down -2% off its high, but it’s mission critical to remember that we are in a 2013/2017-like market environment where SPX is likely to trade in a very tight range on its way to substantially higher levels from here. As discussed in The WOTE Report cited above, there are multiple key reasons this market is 2013/2017-like, but very simply: policymakers are in control.
Don’t Fight the FEDeral Government
The key drivers of this sell-off are interest rates, oil, currencies, and geopolitics. Outside of an exogenous shock that is outside the immediate control of US policymakers, all four of these issues are under strict and immediate control of the Biden administration.
Interest rates? Treasury has a UST buyback program teed up and ready to launch May 1. Even Andy Constan, who purportedly believes Yellen/Brainard don’t play politics with their “tools”, acknowledged an aggressive use of the buyback program would preempt the rise in long-term rates.
I firmly stand by my thesis that UST 30s will be AGGRESSIVELY defended at the 450 bps level. The FED/Treasury apparatus believes it is doing god-like work in keeping Trump from a second term, and they will do whatever it takes. As I said to Bob in the thread linked just above, unlike last summer/fall policymakers do not want the long end of the UST curve tightening on their behalf right now. They believe financial conditions are restrictive enough to keep inflation contained while they fight to get Biden reelected, so they will use any means necessary to impart at least quasi-YCC.
Oil? As demonstrated by its politically effective handling of the Israel-Hamas crisis, the Biden administration clearly has control of the Middle East. Again, if oil breaks out above $100 due to an exogenous event outside of US/Saudi control, that’s a different story. But a grinding rally to $90 oil is NOT a rally to chase when the Biden administration can drive oil down with a simple phone call. Everyone and their brother sees what the oil market is doing to long rates - you think the Biden administration is just going to throw up its hands and allow oil to upend its reelection efforts? Please.
Currencies? Not much to say here. Currencies are under strict control of government policymakers, and the Biden administration is not going to allow a deleterious rise in the US Dollar to occur. One of the great “tells” in place today’s market action that points to direct policymaker involvement is the sell-off in the USD. No, it’s not a huge sell-off, but with stocks and bonds under pressure the USD should be very well bid right now in a flight-to-safety trade - Yellen and Brainard are no doubt involved behind the scenes in today’s price action.
Geopolitics? Tightly correlated with the oil dynamic. Unless China invades Taiwan or Russia launches a nuke, right now the Biden administration is in strict control of geopolitics. The fact Iran & Co haven’t made any real moves outside of the initial attack on Israel says it all.
To repeat: Don’t. Fight. The. FEDeral. Government.