May 14. Dancing with the bond bear
–In spite of a mediocre employment report Friday, soft retail sales data yesterday, and solid demand for the US ten year auction, bonds continue to move lower. Bonds trade bearishly, not because of impending Fed hikes, but because the Fed is data dependent and the data is soft and the Fed may delay tightening. Stagflation. Steeper curve. The red eurodollar pack (2nd year) was up 4.375 yesterday, while golds (5th) fell 0.75. New highs in all deferred one-year euro$ calendar spreads, from reds back. New high in 2/10 to 169.5 and 5/30 to 149.5, both up about 4.5 bps on the day.
–Gold soared over $20 and Silver was up over 60 cents as the dollar continues to weaken. Ambrose Evans Pritchard of the Telegraph is calling it a reflation trade, but adds that it won’t last:
“Epic global bond rout is a QE success story – but it won’t last…
The sudden surge in bond yields is a victory, a sign that markets are finally starting to believe that central banks have defeated deflation”
–I would say it’s reflation without commensurate growth. According to the Atlanta Fed’s GDP Now model, Q2 growth estimate declined 1/10th to 0.7% yesterday. The Blue Chip consensus is around 2.9%. Guess who was right for Q1.
–Rather than conclude that central banks have won the war, my take is that the central banks may be losing control of the puppet strings guiding financial markets. Charles Prince once famously said we have to dance until the music stops. AEP says the bond rout can’t last. But I’ll take a dance with the bond bear.
–Today’s news includes Jobless Claims expected 275k. PPI expected +0.2 with Core +0.1. Thirty year bond auction.
