Morning Roundup

By Mark Masterson on April 19, 2022

Good morning,

Below are the news items moving markets today

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Executive Summary:

Lets kick off the morning with some great news…..Masks will no longer be required in airports, airplanes, and public transit…..

• Florida judge vacates mask mandate for planes, TSA will no longer enforce mandate (Washington Post)

In other news….

The Fed keeps on talking tough.  Yesterday it was Bullard…..

• Fed’s James Bullard says a 75-basis-point interest-rate hike can’t be ruled out as inflation is ‘far too high

Yet – the Fed’s balance sheet hit another record high this week at $8.965 trillion.  Imagine that….The Fed said it ended QE. Yet, its balance sheet has still grown thet past month+.  All talk, and no action.  This at the same time as US inflation moved up to 8.5%, its highest level since 1981 last week.

Behold the balance sheet reduction….

Charting via

@ycharts

Perhaps the massive amount of debt outstanding is an issue.

See below how the Fed funds rate (red) moved inverselyto the massive expansion of Federal debt (blue)….

I recently listened to an interesting theory that laid out why the Fed can’t move rates too high….perhaps 2%-2.5%.

Reason….  The Federal debt is over $30 trillion, and much of it is in 4 year notes or less.  If rates move too high, those notes mature and have to be refinanced at a higher rate.  15% + of all tax revenues are already being used to pay interest on our large national debt.  If rates rise, or double from here on the short term debt, that will also rise to 25-30% of all tax revenue.  That is not likely sustainable.  Which makes the Fed enacting yield curve control a possiblilty down the road to keep rates lower – just like Japan.

Speaking of Japan….

The Yen is just crashing over the past few months.  In fact, the Yen has weakend for a 13th straight day against the dollar, the longest run of losses in Bloomberg data starting in 1971.

• Yen tumbes in longest ever losing streak as BOJ stands dovish  https://t.co/YA349SVipn
• Japan steps up warning on yen weakness as finance minister says weak currency doing more harm than good in current environment (Reuters

The above is why the dollar keeps rising.  The yen and the Euro are both falling as their central banks keep pumping with QE and very low rates.  The Fed is talking tough, but doing nothing of significance, but that talk is enough to make the dollar the best house in a bad neighborhood.

• Dollar index passes 101 for first time in two years as yen slide continues http://reut.rs/3MiQXpB

Sentiment is confusing right now.

I keep seeing the below all over suggesting investors are the most bearish they have been in 30 years……

AAII bull/bear ratio shows the lowest number of bulls since the late 80’s/early 90s

@Northmantrader

If true – that is bullish for stocks as sentiment is a contrarian indicator.

Yet – I also see how retail keeps buying every dip in stocks aggresively.

I also see the Sentimenttrader smart money/dumb money index is still at neutral levels…..

Sentimenttrader.com

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Articles of Interest:

• Central banks:
  • St. Louis Fed’s Bullard says he won’t rule out 75 bp rate hike but that’s not his base case (Bloomberg)
  • Fed has never lowered inflation as much as it is aiming to do now (~400 bp) without causing recession (WSJ)
• Markets:
  • US real yields on verge of turning positive for the first time since March 2020 amid Fed tightening signal (FT)
  • Inflation no longer boosting earnings growth, margin expectations overly optimistic for 2022 (Bloomberg)
• Russia-Ukraine:
  • Zelensky says battle for Donbas has begun (Bloomberg, Reuters, NY Times)
  • White House says more sanctions on Moscow coming (Washington Post)
  • Bleak assessment of Russian economy clashes with Putin rosy picture (NYTimes)

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Charts of the day:

Bonds continue to struggle in 2022.

If the year ended today, it would be the worst in history for the US Bond Market with a loss of 8.5%.

Entering the year, the 2.9% decline for bonds in 1994 was the largest ever.

It is quite oversold, and could stage a countertrend rally anytime.

Interesting chart below showing stock returns during recessions.

Markets react to recessions in stages….

Everyone loves commodities today.

We will likely see a commodity pull-back soon to shake off the late comers to the asset class.

Yet – take a look at the below chart.

Commodities are just now starting to outperform stocks.  This trend will take some time, and may have a decade to run.

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Quote of the day

“Any party which takes credit for the rain must not be surprised if its opponents blame it for the drought.” – Dwight Morrow