Markets flirt with the inflation trade

US treasury yields head higher

Seemingly, the sharp rise in US yields this week has sparked a move from growth to value, or as I put it, from the Nasdaq to the Dow Jones. Whether it lasts is another thing altogether, with such rotations running out of steam over the past 18 months, without really ever gathering momentum. Still, a couple of things are “different this time,” namely the omicron variant is rapidly being repriced as omi-gone. Secondly, the Federal Reserve has commenced tapering its QE and will likely start hiking soon after the mid-year.

US yields should keep rising, not a certainty and the world has been led to water many a time over the past 18 months on this front. The reason? You can buy a 10-year Japan JGB and earn 0.0%, or a 10-year Bund and earn maybe -0.40% but buy a US 10-year note and you’ll earn 1.60% right now. What’s not to like if you are a pension fund manager in Europe or Japan with ageing populations who will all require a pension?  Slap in USD 120 billion a month of buying from the Fed alongside them, it’s hardly a surprise that being a US bond vigilante has become a tough job.

The overnight data from the US didn’t really support the premise either. The Jolts Job Openings dropped by around 0.50 million to 10.562 mio, while quits jumped to 4.50 mio. The ISM Manufacturing PMI fell to 58.7, while the Manufacturing Employment, New Orders and Manufacturing Prices sub-indexes all eased. None of that data was inflationary, more people were working, even as labour market turnover increased, but mostly in jobs people hate, restaurants/food service, delivery and warehouses. PMIs, prices and orders eased but that can be accounted for by holiday seasonality and omicron’s incredible spread, forcing many workers to self-isolate.

The overnight US data is likely to be an outlier, but don’t count out the growth versus value trade just yet, and a US Non-Farm Payrolls number on Friday under 400,000 jobs added could give the Fed Funds hike-a-nistas pause for thought. I do believe that higher US rates, a higher US dollar, and tighter monetary policy will be the bride to make an honest man of big tech, but full confirmation will only come later in Q1. And even then, I am expecting technology to experience more two-way price action, not beat a full retreat, although if you are a pimped up SPAC, this year may not be your year. Inverting SPAC and inserting an R after the C would sum it up best in my mind. Always beware of investment bankers bearing gifts; I’ve been saying this for 20 years, and still, no one listens.

A similar pattern is emerging in Asia today as well, with the North-East Asian heavyweights of China, Japan and South Korea struggling for friends today, while the more value-stock-heavy markets of South-East Asia are generally doing better. Keep a cautious and risk-averse eye on China over the next couple of days. Shares of Huarong Asset Management, a poster child of China corporate governance, returned to the market today after a 9-month suspension. Wearing a fresh USD 6.6 bio government bailout, they promptly fell by 50% in Hong Kong. Another champion of corporate governance, Evergrande, faces potential redemptions of a CNY 4.50 bio bond from investors this weekend.

The China property sector remains a slow-moving lava flow, burning everything, it touches. That pain now switches to domestic investors and unsurprisingly, Evergrande is meeting investors from the 7^th-10^th to try and extend the put option. As I’ve said before, beware investment bankers bearing gifts, or in this case telling you to buy the dip; and remember, there’s never just one cockroach.

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