Hanging By A Proverbial Thread

S&P 500 in a tight range with bearish undertones in the credit markets – but where is the decline? Given the ample Fed support, don‘t count on too much unless the 4,180s zone gives in yet again. Highly unlikely according to the VIX, and even option traders have turned more complacent again. The S&P 500 may be in a precarious balance all it wants, but will gladly take any bullish clue (hello, unemployment claims) – unless the markets lose the faith in the Fed, the bulls are quite safe:

(…) For now, it appears that the Fed trial baloons (Kaplan, even Yellen – thinking about talking taper, suggesting rate hikes) have worked in dialing back the inflation trades to a degree (stock market correction isn‘t thus necessary for players to pile into Treasuries) – more about the Fed‘s „coming soon“ taper bluff.

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.

The much awaited Jun 10 CPI readings would likely come on the hotter side of the spectrum, but would be part and parcel of a continued move to a higher inflation environment where commodities‘ pressures are amplified by job market ones – not that the distortions and disincentives to work wouldn‘t be there.

While inflation expectations dipped a little yesterday, bond yields mostly refused to decline – that‘s a short-term phenomenon, a daily noise worth keeping an eye on, together with the performance of red hot commodities. Copper being in better shape, with sound fundamentals underlined by the speculative stockpiling, rose a little yesterday, but lumber lacking the longer-term advantage of timber confirming its advance, reversed to the downside.

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