18.05.2022
This is important
Lower inflation expectations, bond yields, commodity prices plus sell-side surveys suggesting cyclicals like Industrials & Materials are where an increasing number of short positions reside. None of these are moving in a straight line but turning points can often be a process rather than a single, clean event.
All the above speak to markets’ increasing focus on downside risks to economic growth rather than fears of inflation. In that context, this chart is important.
All the above speak to markets’ increasing focus on downside risks to economic growth rather than fears of inflation. In that context, this chart is important.
The next bit is geeky bond market speak but critical. Qi captures Central Bank rate expectations via forward interest rate swaps. Specifically, 2y1y – 1y1y OIS spreads. For those who trade in listed space & watch Euro$s futures, this is the same as Reds vs. Greens.
Put even more simply it looks at the difference between market expectations for where the Fed Funds rate will be in 3 years time versus 2 years time.
When the spread between the two is increasing, the market is pricing in more rate hikes – a higher ‘terminal rate’ in bond speak. When it is falling, the market perceives less hikes from the Fed.
The spot spread turned negative some weeks back &, on Qi which measures these things in standard deviation terms, the z-score has just fallen into negative territory. It is has now edged below trend.
For some this is the old, post GFC playbook - the Fed hike until they break something, but then undergo a dovish policy pivot – that no longer holds in an inflationary world. For others, this is money markets telling you recession risks have materially increased.
Put even more simply it looks at the difference between market expectations for where the Fed Funds rate will be in 3 years time versus 2 years time.
When the spread between the two is increasing, the market is pricing in more rate hikes – a higher ‘terminal rate’ in bond speak. When it is falling, the market perceives less hikes from the Fed.
The spot spread turned negative some weeks back &, on Qi which measures these things in standard deviation terms, the z-score has just fallen into negative territory. It is has now edged below trend.
For some this is the old, post GFC playbook - the Fed hike until they break something, but then undergo a dovish policy pivot – that no longer holds in an inflationary world. For others, this is money markets telling you recession risks have materially increased.
