BentinPartner Daily
Lat week’ s set of US economic data delivered the picture of a slowing US economy with rather persistent inflation. Core PCE came out at QoQ 2.1% (from 2% last) while the MoM PCE deflator, measuring overall price changes for goods and services purchased by consumers rose 0.4% came in a fair bit higher than the 0.2% expected. At the same time Chicago PMI dropped sharply, posting a third consecutive decline while pending new home sales dropped by the most in four months. Jobless claims climbed as well and with the NFP (unreliable) data due out next Friday, 70% of US states are now seemingly reporting rising unemployment as well.
Global stocks marched higher but with only four of the Mag 7 standing as such (as AAPL, GOOG and Tesla now traded with a lost positive trend and momentum, still covered up by the super strong Nvidia continued performance. Apple was removed from Goldman’s list of top buys over the week end after underperformance in its stock amid concerns over weak demand for its key products. This is having some to think that Mag7 should be replaced by the Super7 European stocks.
While the dollar traded slightly lower towards the end of last week with yields going lower as well, precious metals rallied, breaking out on the upside, possibly in response to the unsustainable US debt trajectory.
Numbers have become difficult to grasp but one perhaps sums them all up nicely. It now takes 100 days for the US debt to increase by one trillion (now totalling USD35trn), with an average US budget deficit of 9.3% of US GDP over the past four years.
That said, the move into bitcoin was even stronger, delivering the best performance so far this year with a 49% gain, propelled by the debt situation and more importantly by the 11 cash spot XBT ETF’s launched last month which enable a wider and faster institutional adoption coupled to supply constraints linked to the upcoming bitcoin halving (which will reduce future XBT daily supplies). The entire crypto market is now following suit as well…
One of the paradoxes of the exploding debt situation is the continued narrowing in credit spreads. At 323bps, HY (high yield) spreads have only been tighter 3% of the past 16 years and with the same observation for IG (Investment Grade) spreads at 93bps.
An interesting article discussing Fed Balance Sheet normalization was published on Friday referring to Christopher Waller, member of the Federal Reserve Board of Governors, and Dallas Fed president Lorie Logan laying out broad principles on how far and how fast QT should go with probably another USD400bn to go, until the Fed ORR (overnight reverse repo) reaches zero, at which point the Fed would stop QT (to avoid liquidity problems) and move to something else (QE?).
In a speech delivered on Friday, Christopher Waller also said he favored, as part of the Fed balance sheet normalization, first to see the Fed Agency MBS holdings go to zero (those bonds have low interest rates and are slow to run off the Fed’s balance sheet due to low prepayment) and second, to shift Treasury holdings towards a larger share of short term tbills. Perhaps the Fed considers long term yields and mortgage spreads as being too low after all and considers some form of “operation twist” to normalize the curve and shift it back towards a more positive shape.
Next week…
Next week will be politically busy, starting with Super Tuesday when 15 states will be holding contests.
Fed Chair Powel will hold a Congressional testimony on Wednesday.
US President J. Biden State of the Union address is lined up for Thursday where he is expected to comment on the success of his term. Higher taxes on the wealthy and corporations are set to be lined up to fund higher safety nets in a new Biden term.
Congress is also expected to reach the first part of a budget deal next week with the second leg due out later (and covering 75% of expenses including military support to Israel and Ukraine).
Next Thursday the ECB will meet and US non-farm payrolls will be published on Friday.
Over the past week, the S&P500 gained 1,0% (7,9% YTD, Z-score 2,1) while the Nasdaq100 rallied 2,0% (8,8% YTD, Z-score 2,5). The US small cap index rallied 3,0% (2,6% YTD). AAPL dropped -1,6% (-6,7%).
The Equally Weighed SP500 gained 1,2% (3,9% YTD, Z-score 2,0), outperforming the S&P500 by 0,2%.. The median SP500 YTD return closed the week at 2,3%.
Cboe Volatility Index sold off by -4,7% (5,3% YTD) to 13,11.
The Eurostoxx50 gained 0,5% (8,6%), underperforming the S&P500 by-0,5%.
Diversified EM equities (VWO) was unchanged (1,1%), outperforming the S&P500 by -1,0%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies was unchanged (3,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (-0,7%).
10Y US Treasuries rallied -7bps (30bps) to 4,18%. 10Y Bunds climbed 5bps (39bps) to 2,41%. 10Y Italian BTPs underperformed rising 9bps (19bps) to 3,89%, underperforming Bunds by 4bps.
US High Yield (HY) Average Spread over Treasuries climbed 10bps (-7bps) to 3,16%. US Investment Grade Average OAS climbed 8bps (1bps) to 1,06%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 1bps (-3bps) to 0,64%.
Gold rallied 2,3% (1,0%, Z-score 3,0) while Silver gained 0,8% (-2,8%). Major Gold Mines (GDX) rallied 2,5% (-11,9%).
Goldman Sachs Commodity Index gained 1,7% (0,3%). WTI Crude rallied 4,5% (11,6%).
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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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