The Fed defers
January 28, 2021
–SPX and Nasdaq fell 2.6% yesterday. The ten year yield fell 2.7 bps to 1.011%. GME surged 134% with a market cap of around $10 billion. BedBath and Beyond BBBY was up 43% with a market cap of $4.5b, Target TGT fell 5% with a cap of $94b.
–In 2000 Nasdaq was near 5000, by 2002 it had lost 80% of its value.
–Powell dismissed the Fed’s responsibility for speculation, but on a question regarding discrimination, he was able to make the leap that it IS part of the Fed’s umbrella in that we want all able-bodied working Americans to be able to find jobs to fulfill the mandate of full employment and maximum output. The logical connection is that the Fed will look past financial stability if it means that people are put to work. Speaking of ‘looking past’, Powell deemed both housing strength and upcoming inflation increases as probably transitory.
–Compare this to a blurb on Zerohedge that a Chinese official said the PBOC is restraining liquidity to combat surges in property and stocks. I have attached a chart of o/n Shibor, from 60 bps in early January to 300 bps now.
https://www.zerohedge.com/markets/meanwhile-china-giant-liquidity-shortage-pushes-overnight-rates-5-year-high
–VIX popped up to 36, interest rate vol was moderately stronger as well. The curve flattened a couple of bps, but Powell’s comments support a steeper curve in my opinion. A persistent theme in rates has been selling of calls and buying puts or put spreads. Yesterday TYJ 138/133.5 risk reversal bought early, settled 5 for the call vs TYM1 at 136-17. The 138 strike is around 85 bp yield.
–News today includes Jobless Claims expected 875k vs 900. Q4 GDP 4.2%. New Home Sales.
