Saturday, May 22ndpetergarnham | May 22, 2021
How long does something have to hang around to stop being transient? That is the big question when it comes to the Fed, inflation and global asset markets. In today’s Macro Briefing 4X Global Research explains why it thinks the market has it right in dismissing short-term inflation concerns, arguing why the Fed will not even signal, let alone deliver a tightening of US monetary policy and why the dollar should remain on the back foot. Jefferies, on the other hand, sets out why we may be in for a longer haul inflation-wise and why investors should prepare for the biggest inflation scare since the 1980s, while TD Securities highlights the complacency in the market and why another taper tantrum could on the cards and Cornerstone Macro says with earnings estimates, interest rates, and inflation all marching higher, now is not the time for equity investors to rotate away from value. Elsewhere, Alpine Macro rails against Bitcoin and sets out why it will all end in tears – one day at least.
FX Inflation USD 4X Global Research
1. US markets playing along to Fed tune … for now
Olivier Desbarres at 4X Global Research notes the dollar NEER is back to within striking distance of the 3-year low recorded earlier this month, despite figures showing US CPI inflation almost doubling in April to their highest level since 1995. He explains why markets are still only pricing in 15bp of rate hikes by end-2022, versus pricing of 12bp of hikes pre the release of US CPI-inflation data. Markets, says Desbarres, are in his view rightly still not fully convinced that the Federal Reserve will signal, let alone deliver, a tightening of US monetary policy in coming months. While not insensitive to valuations and the risk posed by further upside inflation surprises he sets out why he remains bearish the dollar near-term.
Inflation US economy Jefferies
2. Inflation scare commenced
The inflation scare has started to kick off with cyclical stocks enjoying renewed outperformance over growth says Christopher Wood at Jefferies. Indeed, he says investors should prepare for the biggest inflation scare since the early 1980s as pent-up demand is triggered as the American economy normalises. It remains the case that the timing of the severity of the inflation scare will be determined by what happens with inflation expectations, according to Wood, and they have risen over the past 2 weeks as a result of the “shockingly” weak jobs data and the surge in April CPI inflation. This he says, points to further wage inflation pressures, since many Americans are still not incentivised to look for work as they are better off staying at home and claiming emergency benefits from the government.
FX USD TD Securities
3. Catalysts for a USD bump and a risk drawdown
Mark McCormick at TD Securities sets out why he believes a “wall of worry” theme is likely to develop in the coming weeks that will send the US universally higher and weigh on equities and other risky assets. Put simply, he believes complacency is high across global markets. McCormick outlines a few of the catalysts – including a revisit of the Q1 taper tantrum – that could trigger a bigger setback in risk assets and prompt some life back in the ailing USD.
growth stocks value stocks Cornerstone Macro
4. Settle in for an “extended stay” value vacation
Stay invested with value stocks, it’s still too early to tilt towards growth or defence, writes Mike Kantrowitz, Cornerstone Macro’s chief investment strategist in this note. He says the cyclical backdrop for value remains very attractive as earnings estimates, interest rates, and inflation all march higher. The report explains why as the recovery continues to evolve, investors should be more selective, avoiding the junk and embracing companies with improving fundamentals.
bitcoin Cryptocurrencies Alpine Macro
5. Why the Bitcoin mania is a Ponzi game
Chen Zhao at Alpine Macro says after hearing Bitcoin enthusiasts lay out their cases for the cryptocurrency at a recent conference, he remains more convinced than ever that the current craze for it will prove to be a gigantic Ponzi scheme of epic proportions. Cryptocurrencies are created out of thin air and will disappear like mist, he says, and the current cryptocurrency mania is no different from previous historical asset bubbles – they all feed on captivating stories, low interest rates and excess liquidity. Zhao is confident that the end result will be similar. The only uncertainty, he says, is when the Ponzi game will be revealed and at what price levels Bitcoin will crash. In the report Chen explains why he thinks the ebb and flow of the Fed balance sheet will be central to quashing cryptocurrency mania.