Inflation fears returning
Inflation fears are returning to the market, pushing global yields and the dollar higher and momentum equities lower. The surge in yields was first triggered by a hotter than expected US PPI (core 4.4% YoY and 1.0% MoM), followed by a lack of concrete action on the war in Iran during the Trump-Xi summit. The market is now facing a scenario where US CPI could reach 5% by the November midterms.
An uncontrolled upward spiral in Treasury yields is not a foregone conclusion though. Variant Perception’s LPPL crash pattern indicator suggests that 10 yr Treasury bond futures is undergoing a climactic selloff that may result in a reversal higher.
Arkomina Research also points out that the hottest components of core CPI and PPI were caused by factors that may reverse - shelter, gasoline, energy, and trade services. Gasoline, energy, and trade services were the result of the closure of the Strait of Hormuz, while shelter was caused by a statistical artifact at the BLS:
The BLS added a one-time month bump to Shelter due to the government shutdown data missing in Oct. This is not an actual Shelter inflation, but an artificial statistical bump in Apr.
In Apr, Shelter was up +3.30% YoY, while market rents, like the Apartment List National Rent Index (ALNRI), remained well negative (-1.65% YoY). This 5.0 pp gap between Shelter and ALNRI is huge and unsustainable.
Shelter is a flawed statistic, showing higher statistical numbers when actual rents paid in the market are much lower. With an up-to-date Shelter, headline CPI would be below 2%. Core CPI ex-Shelter is at +2.31% YoY and remains close to 2%, where it has hovered for 3 the past 3 years.
Although 30 year yields are back above 5.10% for the third time in three years, that level has attracted pension funds and other institutions in the past, preventing yields from following through higher.
I don’t have any positions in bonds or FX at the moment, as the market’s next move depends on US-Iran peace negotiations - an outcome where I see no edge in betting on.
Signs of crowding
The Bofa Global Fund Manager survey is showing some signs of bullish crowding in the markets, especially in semis.
The flip side to this is that the thing that everyone worries about usually ends up not being as bad as people think it will be, resulting in a buying opportunity.
The market is OW equities again. This can go on for months though.
The market bought equities at a record pace:
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