FEDS hawkish dots kill reflation

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

Last week’s FOMC meeting was surprisingly hawkish with the dot plot showing 2 rates hikes in 2023, up from zero expected. The US yield curve flattened dramatically signalling that a premature tightening by the FED would derail the economic recovery. The consensus “reflation” trade, that has been in place for the last 6 months since vaccine announcements last November, saw a major drawdown as it appeared the FED would not tolerate inflation despite previously calling it “transitory”

The SPX managed to test the 4160 area (Gamma flip point) post options expiry. A strong bounce followed and we recovered the entire sell off in US equities, led by the tech sector which benefitted from rotation back into growth as yields came lower. European and Asian equities remain less resilient as the value trade will struggle if tapering starts to get priced in and the dollar strengthens.

The rally in the DXY up towards 92.5 has started to cause havoc across the macro landscape. We can see this move having some further upside towards 93.5 (and even 96/97) if tapering talk intensifies and consensus shorts feel more pain.

Gold took a beating as the FOMC pivot moved real yields by 20 bps. The strong dollar which is anchored by the 2Y rates has made it difficult for Gold to recover even as real yields retraced. Oil remains bulletproof as the supply growth will lag demand thanks to a cautious OPEC. Metals such as Copper that have been major reflation beneficiaries had a deeper correction as USD rallied and are likely to remain under pressure as positions get cleansed. Longer term this dip across commodities provides asset allocators a decent opportunity to diversify into some inflation protection type assets. Filmed on on Tuesday 22nd June 2021.

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