Where Next In The Taper Drama

S&P 500 (SPY) duly rose on the little weaker than expected non-farm payrolls as the taper theme (start of discussions moving to serious contemplation) got dialed back. The Fed‘s forward guidance maneuver can continue, and inflation trades breathed a sigh of relief. Encouragingly for the S&P 500, reflation trades weren‘t affected as evidenced by value stocks rising again regardless of the long-dated Treasuries action.

gold round coin on black surface

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Of course, volatility welcomed the retreat in yields as much as technology did – but the option traders aren‘t buying into the upswing nearly as much. Practically speaking, Friday‘s moves in the dollar, some commodities and precious metals, reversed a great chunk of the preceding day‘s bigger swings. The guessing game on the Fed‘s taper goes on, and the upcoming CPI readings won‘t add to the markets‘ peace. Most likely, fueling the sense of taper urgency as the inflation figures won‘t be coming on the low side. Add in the job market slowly catching fire, and you‘ll understand why I have been calling for months for elevated inflation readings.

It‘s the market reaction what matters – what is at stake, is how much the Fed is still expected to fight inflation, whether it plays ostrich in toeing the transitory line much to the satisfaction or dismay of the marketplace. As I wrote on Friday:

(…) Should the transition into a higher inflation environment be appreciated for what it is, the dive in gold, silver and copper wouldn‘t have been that steep. On the other hand, the sharpest moves tend to be the countertrend ones – yes, I‘m still of the opinion that the current reflationary period with reopening rush (more juice left in value over growth trades) is conducive to higher stock market and commodity prices. Including precious metals, naturally.

Moreover, the taper talk (…is…) exposing a key vulnerability in the Treasury market. The Fed is well aware that its ample support is a condition sine qua non, and that rising yields (rising real rates) aren‘t in the largest borrower and real economy‘s interests. Financial repression has to come into the picture, and that‘s one of the reasons why precious metals have been on a tear lately. We‘re also a long way from inflation breaking the back of stock market bulls.

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