Bonds yields and commodities collapse on recession fears

In this week's Macro Insight I discussed...


MARKET ACTION

Bonds caught a bid last week as economic data came in weak signalling a much higher chance of a recession.

Stocks resumed the sell-off as quarter-end buying seems to come early and was met with selling to close out the month. Friday did see a relief rally though as a FED pivot gets priced in for early next year. Credit markets also continued to trade wider having not really participated in the rally.

RECESSION WATCH

The big news at the end of last week was the Atlanta FED GDPNowcast dropping to -2.1% suggesting we may already be in a technical recession(2 consecutive quarters of negative real GDP). Jim Bianco showed that going back to 2011, the forcast error (excluding pandemic shutdown) has never been above 1.9% so it seems extremely likely that the GDP for Q2 will end up negative based on these numbers.


WHEN WILL INFLATION PEAK?

The reason that the FED may not be able to do anything about the growth slowdown which is impacting stocks is that there is no clear evidence on a material slowdown in inflation.

According to both MI2 Partners and 42Macro, their models suggest a peak is more likely in late 2022, which would make it very hard for the FED to slowdown their hiking cycle early enough to prevent more carnage in markets.

MIXED SIGNALS IN JOBS MARKET

The labor market up until now has been robust and the large amount of openings(JOLTS) plus rising wages suggests a strong demand for workers. However, the latest data on Tech sector layoffs (usually a leading indicator) shows an acceleration and this is only likely to get worse if a recession is coming.


EARNINGS THE NEXT SHOE TO DROP

This has been the worst first half performance for US stocks in over 50 years.

Cash has outperformed 90% of other assets, showing that it very much is a position an one that many clued up analysts have been cheering all year.

Tech valuations have repriced dramatically and are more in line with consumer staples looking at MSCI World indices.

SPX PRICE ACTION

SPX started last week on a strong note as markets tried to position for a large amount of quarter-end buying flow. It turned out that that there was no- one left to buy and we actually sold off into month- end despite a JPM put spread collar roll that bought around $7Bn delta and pension fund rebalancing after another terrible quarter for stocks.


EURO BREAKING DOWN

As usual, the EUR was unable to hold any rally and quickly rejected the 1.06 area.

Credit markets in Europe have been gapping wider looking at iTraxx main and European equity vol has been even more lagging than VIX relative to US credit.

Germany’s trade surplus has disappeared due to energy problems and weakness in manufacturing.


SPEC POSITIONING REDUCED IN COMMODITIES

We had said a while back that commodities would be vulnerable to a speculative de-risking period as they had been the stand out performer relative to other asset classes.

We can see from CFTC data that they have been cutting length across the complex and even increasing short in some of the metals.

Percentage wise Silver, Natgas and Wheat saw the largest declines in net length.


Filmed on on Tuesday 5th July 2022.


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