Jackson Hole Round Trip in 5/30
August 22, 2021 – Weekly Comment
The Taliban is not the south — the North Vietnamese army. They’re not — they’re not remotely comparable in terms of capability. There’s going to be no circumstance where you see people being lifted off the roof of a embassy in the — of the United States from Afghanistan.
–President Biden, July 8, 2021
These steps will enhance our productivity — raising wages without raising prices. That won’t increase inflation. It will take the pressure off of inflation, give a boost to our workforce, which leads to lower prices in the years ahead. So, if your primary concern right now is inflation, you should be even more enthusiastic about this plan.
–President Biden, July 19, 2021
Now I am not saying that if you’re horrendously wrong about one thing, that it should throw a cloud over all other lofty proclamations. I’m not even sure what Biden is saying in the second excerpt. Increased productivity suggests more output with less input, and if wages are able to increase it sounds like it’s a plan to expand capital investment and automation. In any case, the American public seems increasingly concerned about cost-of-living increases, notwithstanding the 15% drop in WTI crude so far in August (CLV1 73.20 on July 30 and 62.14 Friday). In fact, this decline looks a little like initial weakness in 2020, when Covid concerns were just starting. Of course, in 2020, the oil decline was exacerbated by the Saudi/Russia rift on restraining output, with the former flooding the market, culminating in negative prices in April. Certainly the trajectory of delta is a major variable.
Dallas Fed President Kaplan has recently softened his hawkish stance due to delta. The Jackson Hole conference will allow Powell to weigh in on his assessment of the potential economic impact of the new variants. Bloomberg ironically notes that “Wyoming’s Teton County, home to Jackson Hole, has the nation’s highest per-capita income from assets, according to a study by the Economic Innovation Group. The analysis found a sharp increase in geographic concentration of asset ownership over the past decade.” I’m sure the Fed’s financial engineering has nothing to do with it…
In any event, it was almost exactly one year ago that Powell announced, on August 27, 2020, that the Fed was adopting FAIT, Flexible Average Inflation Targeting. Even though the last two PCE yoy price prints were 4.0, the past five year average is 1.7% and the past ten year average is 1.6%. I think the hawkish dot plot at the June 2021 FOMC removed, to some degree, the market’s faith in the Fed to continue being “credibly irresponsible”.
Below I am adding a few charts to provide some indication of how the market is set up going into this week’s Jackson Hole Conference. Note that on Friday, we will also see the latest PCE price data, the Fed’s preferred measure of inflation, which was 4.0 last and is expected 4.1, which would equal the high in July 2008, sparked by the historic oil rally of 2007 into ‘08 from $60 to $140. (chart below)
First, when looking at 5/30, it has done a round trip from the FAIT announcement, from 112.6 on August 26, 2020 up to a high of 163 on February 24, 2021, back down to 108.9 on Friday. It’s clear that the hawkish FOMC in June was a huge catalyst for flattening.
Now let’s look at yield charts of 5, 10, and 30 year treasuries.
Below is the five-year. The low in 2020 came in August, just before FAIT, at 19 bps. Since then it has left a double top ~94 bps, and in the beginning of this month had retraced almost exactly 38%, to 65 bps.
The ten-year note put in a low of 51 bps on August 4, 2020, rallied to 1.74% by the end of March, and has since then seen its yield decline, not quite to the 50% retracement, now sitting close to the 38% retrace at 1.258%.
The thirty-year, from the same starting date, went from 1.19% t0 2.45%. The yield topped prior to tens, and declined to the exact 50% retracement of 1.82%. It’s now 1.87%. The five-yr yield has remained the most stubborn.
The market is fixated on taper, because taper leads to actual rate hikes. My read on yields is that, having held retracement levels, they are likely to continue higher. If 5s were to convincingly break below the 38.2% retrace of 65, I would reconsider. I think the five-year (and green eurodollars) are key to the outlook, and I think a modest bear flattener, with all yields higher, Is what the market indicates.
With Yellen putting her support behind another Powell term, it gives him more power to slow-play rate hikes, even as inflation data shows signs of acceleration. This should limit downside to the 5/30 spread, though it appears as if a drop to 100 or just below could occur in the near term, especially if crude oil tanks.
What is clear from the June FOMC is that Powell was overruled. Because of delta the entire Fed may shift to a somewhat more accommodative stance, but I don’t think it will change the taper schedule, because shelter and other basic living costs are rising quickly, which will probably be reflected in the next several months of inflation data.
While I have favored a steeper curve, price action currently does not seem to support that stance unless the Fed is able to quickly pivot to uber-accommodative again. I would certainly not sell the curve, because I think downside is limited. Buying deferred midcurve put structures is probably the best risk-reward.
| 8/13/2021 | 8/20/2021 | chg | ||
| UST 2Y | 21.3 | 22.4 | 1.1 | w/I 24.2 |
| UST 5Y | 78.7 | 78.3 | -0.4 | w/I 79.7 |
| UST 10Y | 129.7 | 125.8 | -3.9 | |
| UST 30Y | 194.6 | 187.2 | -7.4 | |
| GERM 2Y | -73.9 | -74.8 | -0.9 | |
| GERM 10Y | -46.7 | -49.5 | -2.8 | |
| JPN 30Y | 65.0 | 64.0 | -1.0 | |
| CHINA 10Y | 289.2 | 284.8 | -4.4 | |
| EURO$ Z1/Z2 | 27.5 | 26.5 | -1.0 | |
| EURO$ Z2/Z3 | 55.5 | 54.5 | -1.0 | |
| EURO$ Z3/Z4 | 35.5 | 32.5 | -3.0 | |
| EUR | 117.99 | 117.01 | -0.98 | |
| CRUDE (active) | 68.21 | 62.14 | -6.07 | |
| SPX | 4468.00 | 4441.67 | -26.33 | -0.6% |
| VIX | 15.45 | 18.56 | 3.11 | |
https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm
https://www.bloomberg.com/news/articles/2021-08-18/u-s-wealth-gap-rises-with-jackson-hole-coming-at-the-top?sref=cv51C53O
