BentinPartner Daily
Over the past week, stocks rallied supported by what was deemed to be a dovish J. Powell following last Wednesday’s FOMC meeting.
Answering a NYT journalist, Fed Chair Powell said;
”You saw last year very strong hiring and inflation coming down quickly. We now have a better sense that a big part of that was supply side healing, particularly with growth in the labour force. So, in and of itself, strong job growth is not a reason for us to be concerned about inflation.”
Later in the press conference, he added;
“Of course, we are committed to both sides of our dual mandate, and an unexpected weakening in the labor market could also warrant a policy response.”
Those were twin-dovish answers not only downplaying risks to inflation from a still tight labour market but promising to respond to upcoming weakness. This was seen as an “all clear” by already exuberant financial markets, especially in absence of any mention made by the Fed Chair of any degree of market excess to be factored into Fed policy.
Still, some analysts noted the obvious contradiction between the Fed simultaneously revising inflation higher, unemployment lower and growth expectations higher.
As we wrote on Thursday, at the same time as the Fed published stronger growth forecasts (2.1% from 1.4% previously expected), an increase in core PCE inflation (2.6% from 2.4% expected previously) and a lower unemployment (4% from 4.1% previously expected), Fed Chair Powell downplayed dot plots signalling an upwards drift in policy makers interest rate expectations, by saying that up to three rate cuts were still possible later this year. He also said discussions took place about the balance sheet runoff, with implications that the QT program would likely soon be reduced in size.
It is easy to understand why the Fed would want to support its dovish tilt with the massive federal debt load, spiralling debt service costs and induced wealth effects, pushing investors to support/revive the real estate markets despite higher borrowing costs.
There was a risk for the dollar of course but I reckon the Fed is watching it as a “hawk” and does everything in its power to prevent the dollar from trading lower amidst heavy bond supply and tepid Treasury auctions.
Last week, BoJ scrapped the world’s last negative interest rate…at the same time as its yield curve anchoring policy…. at the same time as it said it would continue to buy bonds which was an invitation to cover shorts on JGB’s (which closed the week 6bps lower) and to send back JPY to recent lows against both the dollar and the euro. Japan's Nikkei also surged 5.6% (+ 22.2% ytd).
JPY weakness helped dollar strength vs. CNY as well and given that the ECB can only ease in June, EUR weakness was sort of unavoidable. The surprise decision by the SNB to cut rates on Thursday also played its part to reinforce USD strength, slamming CHF vs. USD.
The US current account deficit also narrowed in Q4 to the lowest level in 3 years.
While stocks and risk assets witnessed another week of gains, we found two or three things unsettling enough to potentially herald a near term correction, although not necessarily anything that a pure trend follower (which I am not) would necessarily get alarmed by.
A stubborn inversion of the yield curve that has never been inverted for so long, remains (statistically at least) the ominous sign of a pending recession.
Also, while AAPL has been trending down for some time (something that yours truly trend follower has noticed, reported and acted upon), the AAPL stock price turned out of favour and talks of the company now facing an antitrust action was an sign of likely more trouble ahead, if not for the stock price, at least for the company’s lawyers who fought back last week saying the DOJ lawsuit threatens its core values and innovation capabilities, stating that “the lawsuit compromises the essence of its products and their competitive markets”. The last time DOJ took on seriously a tech giant (MSFT in 2001), it cost the company 10 years of lateral stock price action.
China sales will not help the company (ever again as it used to) with the relationship between China and the US only likely to sour further (with or without Trump returning).
It might take an act of faith to stick to a large AAPL overweight in this context. And Everybody owns that share, one way or another, in a passive (ETF) or more active form. One down on MAG7.
TSLA has also been a noticeable underperformer this year (-31% ytd) for all sorts of reasons including competition from China and elsewhere but in our view and more importantly, for much more structural reasons related to the potential prospects (or lack thereof) of the EV market.
It has started to down on people that the “all in” government planners’ force fed EV strategy pursued beyond all practical considerations will be, not only impossible, catastrophic for the car industry as a whole (and the economies heavily dependent on it), but also likely lead to a drastic reduction of car affordability and use (admittedly a major positive externality for climate change…ultimately). The bottom line is going to be a phasing out of the individual car…Nothing that the Davos Forum guru would find to be out of line with his prediction that people will end up owning nothing and renting everything.
The trouble laid bare at Herz last week whose GM resigned over a soured bet on a large EV fleet (that people do not want to buy even at a deep discount) might foretell and reveal something more unsustainably fundamental about the “all in” EV strategy.
There is no question about the good intentions at the heart of the strategy but it has also started to dawn on people that EV’s are more expensive to buy, lose value faster, encompass insurance costs that are 25% higher, imply higher maintenance costs with higher repair costs in case of accident (and soaring risks to end up totalled on the first accident), do not last a long (think about your handy battery wearing out), strain the electrical grid (already obvious in the US), imply accelerated wear out of roads consecutive to driving cars that are 25% heavier, not to speak about the impractical use of EV’s in cold and mountainous regions. In the place where I live, there is now a multi-year plan to get rid of “all” surrounding parking places (parking places are present on both sides of the street) and to replace them by trees. At least this strategy is consistent and honest. The purpose is to force people out of their habit of owning a car. And in that case, the EV’s best use will be as luxury goods for people owning two cars and two garages. In any case, this was an aside observation to say that we have reached MAG7-2.
The third cause of concern is the adverse geopolitical situation.
There is unfortunately nothing good coming near term beyond more aggravation on both sides of the two hot war spots of the world, except more denial of the facts, stubbornness, blindness and costly hubris of disconnected and untested politicians possessing no military education and/or experience.
That said, markets remained resilient bringing more evidence that the rally has been, not only intensifying towards momentum and speculative plays of the AI space (an additional risk) but also broadening towards more value plays (industrials, banks and more recently real estate).
Another factor beyond a dovish Fed, Momentum and FOMO keeps supporting stocks: US stock buybacks and corporate acquisitions at a six-year high of $625bn this year.
Over the past week, the S&P500 rallied 2,2% (9,7% YTD) while the Nasdaq100 rallied 2,9% (9,0% YTD). The US small cap index gained 1,3% (2,2% YTD). AAPL dropped -0,2% (-10,5%).
The Equally Weighed SP500 gained 1,4% (5,6% YTD), underperforming the S&P500 by-0,9%. The median SP500 YTD return closed the week at 6,4%.
Cboe Volatility Index dropped by -9,4% (4,9% YTD) to 13,06.
The Eurostoxx50 gained 1,1% (11,8%), underperforming the S&P500 by -1,1%.
Diversified EM equities (VWO) was unchanged (1,2%), underperforming the S&P500 by-2,2%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,2% (4,5%, Z-score 2,5) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,5% (-0,9%).
10Y US Treasuries rallied -11bps (32bps) to 4,20%. 10Y Bunds dropped -12bps (30bps) to 2,32%. 10Y Italian BTPs rallied -6bps (-6bps) to 3,64%, underperforming Bunds by 6bps.
US High Yield (HY) Average Spread over Treasuries dropped -6bps (-27bps) to 2,96%. US Investment Grade Average OAS dropped -1bps (-9bps) to 0,96%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 5bps (-3bps) to 0,65%.
Gold gained 0,4% (5,0%) while Silver sold off by -2,0% (3,7%). Major Gold Mines (GDX) dropped -1,0% (-4,5%).
Goldman Sachs Commodity Index dropped -0,2% (3,0%). WTI Crude dropped -0,5% (12,5%).
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
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