News of tapering is premature
January 13, 2021
–Early morning weakness in fixed income subsided after the ten year auction; yields ended only modestly higher. Tens up 0.7 bp to 113.8. 2/10 squeaked to a slight new high of 99.3. Eurodollars were flat to down 1 out to five years. Today’s news includes CPI, expected +0.4 month/month with yoy Core 1.6% (last at 1.6). Beige book released this afternoon in front of the Jan 27 FOMC. Brainard speaks at 1:00pm on the economy, which could be an important event. An article on BBG this morning notes: “In the past week, four of the Fed’s 18 policy makers have publicly raised the prospect they may discuss reducing bond buying – currently running at $120 billion a month – by year’s end. In contrast, several others have called the debate premature and Fed VC Clarida, the most senior central banker to weigh in, has said he doesn’t expect any changes before 2022.” So today Brainard, who will probably become the next Fed Chair, weighs in, followed by Powell tomorrow. While Fed officials still lean towards a slight downward risk in inflation (according to Clarida), markets have taken a different view. Since November, WTI is up 43% from around $37/bbl to $53. Corn is up 33% over the same timeframe, from about $4 to this morning’s $5.32. A story on ZH citing FreightWaves.com notes: “It has never been more expensive to get a container of goods across the ocean.” (The article is mostly about anomalies in LNG shipping). And, in terms of asset price inflation: “The percentage of NYSE stocks above 200-day moving averages has surpassed 90% for the first time since 2009. This rare event has happened only 5 times using weekly data going back to 1974.” The dollar has had a small bounce which feels like its fading.
–The BBG article cited above voices some concerns about a repeat of 2013’s “taper tantrum”, but I think a reduction in bond buying will have a more negative impact on stocks than bonds. In any case, Brainard and Powell will defer the idea of tapering any time soon in the quest for official inflation readings above 2%. By then, of course, it will be too late!
–Decent buying yesterday in TYG 137c which traded mostly 4 but settled 6 ref 136-125 with an open interest jump of 51k. These were the most heavily traded TY call and expire on the 22nd, two days after the inauguration.
