Yields back up ahead of CPI as gold crumbles and dollar climbs

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


Tech stocks continued their rally last week as better PMIs and jobs data provided some optimism around a potential soft landing. Credit spreads also tightened with the risk on tone.

Yields moved higher with US 10Y back up to 3.00% and good data counters the recent recession fears which took bond yields lower. All eye on CPI this week.


In his latest piece on macro compass @Macroalf asks the question, are we in or heading into a global recession?

With and extremely steep rollover in Global Credit Impulse (running at even weaker than GFC) it appears that SPX EPS growth is likely to have a “Wile E. Coyote” moment in a few months!


US CPI will be closely watched this week on signs of inflation peaking and the bond market reaction. Recent recession fears have helped to fuel a bid back to bonds with some high-profile macro guys saying rates have peaked and the ED curve pricing in aggressive cuts as early as next year. Jim Bianco points out how the base effects starting next month will make it very hard for YoY inflation prints to come off significantly enough to slow the FED down.


Looking at the rolling windows of 1-month and 3- month realized vol on SPX, we see some large days are dropping out this week and this should send 1m below 3m realized which is likely to induce some buying of equities.

The market would need to sell-off dramatically this week to stop this buying as it would keep realise vol elevated.


SPX traded firmer lasty week on better-than- expected PMIs and Non-farm payrolls beating expectations. Whilist the labour market suggests that we may not be in recession yet, it does keep pressure on the FED to stay tight and hence the rally post non-farms has not managed to persist.

A general risk off tone led by China and Europe after the weekend has the SPX slipping back ahead of key CPI data and earning season kicking off this week.


Looking at equity vol, we see that skew remains depressed and VIX is lagging FX and rates vol. The higher rates vol is more certain to create dispersion within equities but for now is not filtering through to higher vol in the broader indices.

Another interesting observation can be seen in the VVIX/VIX ratio which has been trading lower. This typically happens when VIX spikes which I have highlighted by the green lines on the chart.


The dollar continues to march higher as DXY is now near 10Y highs, up another 1.5% on the week. Broader based dollar strength as GBP, EUR and JPY all get smashed along with commodity currencies. You would expect some consolidation after such a move, but with some aggressive rate cuts priced in for next year already, a hawkish reaction to inflation data may fuel even more strength.


Gold broke down as we have been suggesting would happen, due to our outlook for higher real yields and a stronger dollar.

The key support of 1725 now need to hold to prevent a re-test of the 1680 support zone which would more critical.

Filmed on on Tuesday 12th July 2022.

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