Mid-Week Update

April 17, 2024

The ripples of increased bond volatility are now impacting other asset classes, with large FX carry unwinds being the latest victim of the ongoing adjustment process. Never mind the uncertain geopolitical situation, the real culprit of it all is found in how bonds have impacted other corners of global macro. They usually do, with market participants now realising that the dovish central bank levers are going to be hard to pull, given the overall macro backdrop. Ladies & gentlemen, this is nothing new. I have repeatedly warned that the Fed’s December pivot was a policy error, and markets have now slowly adjusted to that view. We have moved from roughly 7 25 bps rate cuts to only 1.5.

Overnight, New Zealand CPI surprised to the upside, especially the domestic non-tradeable number. Meanwhile, UK inflation subsided but less than expected, again prompting more questions about whether there is an element to global inflation stickiness, which previously was not on the macro radar.

For now, markets simply push out rate hikes, which has also been voiced by yesterday’s comments by Powell, who acknowledged the wait-and-see mode before it is appropriate to cut rates. While not my baseline scenario, it doesn’t take too much imagination to see rate hikes coming back into markets. The stage is clearly set for such a scenario to unfold.

For now, let’s look at what the models are telling us. They have guided us correctly in shorting bonds and being long the USD; they have also prompted us to sell equities last Friday.

Let’s dive straight in.