Fed and rates

S&P 500 did marvellously slide on poor PPI data reinforcing my so frequently raised sticky inflation making a return. For all the goods inflation retreat, the services one is the one not to budge easily. And the Fed knows that doesn‘t exactly mean disinflation, which is why the talk of 50bp hike in Mar surfaced. The intraday solid buy the dip attempt, has fizzled out, and the continued rise in yields across the board fueled overnight stock market decline as much as the USD relief rally continuation.

While inflation returning is bullish real assets, the USD upswing and rising rates (now practically comparable to the S&P 500 earnings yield – redefining what‘s risk-free and overpriced) serve as a powerful drag on especially precious metals (no local bottom there – as per prior Thursday‘s premium analysis, the short-term tune has changed, and it would take many weeks to see one), and copper amid all the supply deficits pointing to inflation‘s resurgence, won‘t save the day.

A lot of deleveraging ahead still as the overly loose financial conditions get tightened – both by the Fed and commercial banks. Don‘t forget the Treasury general account and repo facilities when assessing conditions. What‘s the terminal Fed funds rate, is being redefined from 5.50% upwards, and the yields differential to the rest of the world, is responsible for the USD upswing. Hear that sucking sound of liquidity (to still) disappear!

We‘re in for a dead cat bounce attempt today – even if import prices don‘t point to yet another source of quickening domestic inflation, the quickening export prices pace reveals that U.S. inflation is being also directly (not just via exchange rates) exported.

Buy the dippers will try again, and would struggle at 4,095 – 4,105 area – doubtful they can get there today. Market breadth and volatility are rather silently supporting the topping process as having been well underway already, and one that wouldn‘t be developing in a one way fashion. 4,040s would take time to break, and require continued leading weakness in the riskiest of bonds, the junk ones. We‘re getting there, and getting today‘s options expiry volatility out of the way, would be very constructive for the bears.

All those earnings to disappoint, layoffs to spread, and recession arrival quickened by more hikes and balance sheet shrinking, will power the coming very significant stocks decline. And precious metals refusing to keep declining more, would a sign we‘re getting ready to rally, not just in real assets but including in stocks.

Of course, that‘s a long-term perspective – one measured in months rather than weeks.