Tug Of War And Its Profitable Resolution

S&P 500 bid is improving in breadth, and the fake moves rich consolidation‘s lows are getting more distant. And they are likely to stay that way as the market reassesses the Fed intentions to talk about talking taper – making the dollar catch a bid at first, the greenback keeps predictably tanking now, meaning that the Fed noises aren‘t to no surprise of mine taken seriously in the currency arena:

(…) It‘s when the Fed would really move that the greenback would go up again. The important word here is „really“ – this doesn‘t qualify yet, but the noises can‘t be ignored.

The market simply isn‘t convinced the Fed is serious about taking on inflation through (gradual) removal of the punch bowl – or about shaping its forward guidance credibly this way (yet). Inflation expectations are cooling down a little, and the Treasury market is tracking them closely. But this doesn‘t mean that bonds are taking the central bank seriously – this move is part and parcel of the transitory vs. getting (practically permanently unless a Fed game changer arrives – still unlikely) elevated inflation readings debate that I discussed on Monday:

(..) while I think that the red hot CPI inflation would die down a little (i.e. not keep rising ever as steeply as was the case with Wednesday‘s data) once the year on year base to compare it against normalizes, a permanently elevated plateau of high and rising inflation would be a reality for more than foreseeable future simply because the Fed would be as behind as Arthur Burns was in fighting the 1970s inflation, and upward price pressures in the job market pressures would kick in.

Thus I see the Treasury market reprieve as likely to continue, affecting positively tech and the defensive sectors such as utilities (currently forming a bullish flag), or the more bullish consumer staples and industrials posture. We‘re still in the value outperforming growth environment (reflation and reopening themes), it‘s just right now (last few days) that tech is pulling stronger ahead than value. The discrepancies in sectoral performance of late have been the explanation behind the S&P 500 pendulum swinging bullish delayed again. Value‘s reaction to the yields trajectory ahead would be telling, and I have no doubts there is quite some more juice left in the long value trade (and that the Russell 2000 isn‘t rolling over to the downside here).

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