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A Not So Tame Inflation Story...

BentinPartner Daily



Over the past week, US stocks posted minor losses with markets still looking more jittery after a second straight month of stronger-than-expected inflation (Gas and shelter prices drove the February yoy CPI to 3.2% (from 3.1%) which put off all expectations of a Fed rate cut before June and reduced expectations of rate cuts until year end from 5 to 3, in line with the Fed’s own current forecast (which it might want to revise down further on Wednesday when the Fed meets).

 

Friday’s session delivered the actual equity market loss of the week but most of it pointed at the options expiration and at the look of volatility (which actually closed the day unchanged after a spike higher on Friday), the level of fear or investors’ concerns remained, rightly or wrongly, fairly contained.

 

While stocks proved resilient, bonds, in contrast, were punished with 2y yields closing the week 25bps higher on the poor inflation reports that were aggravated by another dismal monthly fiscal deficit (and recent weak bond auctions).  The deficit last month was $296bn, up 13% from February 2023… with outlays for the month growing 8% while receipts rose only 3%.  For the first five months of the fiscal year, the deficit rose by $106bn, or 15%.

 

Last week, J. Dimon urged the Federal Reserve to wait until after June before cutting interest rates, arguing the central bank needs to shore up its inflation-fighting credibility. More surprisingly perhaps, US Treasury Secretary Janet Yellen said it’s ‘unlikely’ that market interest rates will return to levels prevailing before the pandemic triggered a wave of inflation, driving yields higher.

Despite corporate bonds and high yield spreads trading at very tight levels, more companies were reported to have defaulted in Q1 2024 than in any Q1 since the global financial crisis as high interest rates continue to take their toll. At 29, this year’s count is the highest since the 36 recorded during the same period in 2009.

 

Precious metals closed slightly higher with most strength coming from silver catching up and gaining 10% last week while copper rallied in tandem, along with a few other commodities in particular oil.

 

After printing a fresh high for the year at 73’600, bitcoin, another of this year’s high flyers, dropped -8% (now 67’800). According to Google Trends data, Bitcoin’s record-breaking rally attracted more searches for bitcoin than Taylor Swift and Beyoncé combined as the largest crypto set new all-time highs leading investors to pour a record $2.7bn into crypto assets last week prior to the selloff.

 

After Japan’s largest union group announced stronger-than-expected annual 5.8% wage increases on Friday, the BoJ is now widely expected to raise interest rates for the first time since 2007 tomorrow at the same time as it eliminates the “around 0%” target for the long-term interest rate and abolishes the purchase of ETF and J-REIT and possibly yield curve control altogether.

 

To the extent that they were largely telegraphed, the BoJ decisions are unlikely to deliver an electro-choc to Japanese (and other DM) asset markets. On the other hand, they are not expected to provide much of a boost either…

 

Elsewhere this week, the Reserve Bank of Australia is set to extend its rate pause while Bank Indonesia and the Bank of England will also deliver policy decisions.

 

 

 

 

 

Over the past week, the S&P500 dropped -0,4% (7,3% YTD) while the Nasdaq100 dropped -1,2% (6,0% YTD). The US small cap index sold off by -2,1% (0,8% YTD). AAPL gained 1,1% (-10,3%).

Semis sank 4.0% (13.9% YTD) while Biotech also shed -2.3% (-3.9% YTD).

 

The Equally Weighed SP500 dropped -0,7% (4,2% YTD), underperforming the S&P500 by-0,3%. The median SP500 YTD return closed the week at 4,5%.

Cboe Volatility Index sold off by -2,2% (15,7% YTD) to 14,41.

The Eurostoxx50 gained 0,5% (10,6%), outperforming the S&P500 by 0,9%.

Diversified EM equities (VWO) dropped -0,4% (1,2%), matching the S&P500.

 

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,7% (3,3%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,2% (-0,4%).

 

10Y US Treasuries underperformed with yields rising 23bps (43bps) to 4,31%. 10Y Bunds climbed 18bps (42bps) to 2,44%. 10Y Italian BTPs underperformed rising 12bps (0bps) to 3,70%, outperforming Bunds by   -6bps.

US High Yield (HY) Average Spread over Treasuries dropped -12bps (-21bps) to 3,02%. US Investment Grade Average OAS dropped -6bps (-8bps) to 0,97%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (-8bps) to 0,60%.

 

Gold dropped -1,1% (4,5%) while Silver rallied 3,6% (5,8%). Major Gold Mines (GDX) gained 0,8% (-3,6%).

 

Goldman Sachs Commodity Index rallied 2,7% (3,3%, Z-score 2,3). WTI Crude rallied 3,9% (13,1%, Z-score 2,1).

 

 

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Marc Bentin serves as Economic Advisor to Blue Lotus Management,

a specialist multi-manager investment firm, which seeks to provide investors a compelling alternative to the traditional 60/40 equity and bond portfolio by targeting higher returns without amplifying equity risks.


BentinPartner GmbH is Advisor to the Phi Funds AIF, an umbrella Alternative Investment Fund registered and regulated in Lichtenstein, specializing in the management of Funds focused on physical precious metals.

 

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