Strategy Note /

Fever Break

  • A fever break from the inflation, Fed hike cycle, bond market selloff lies ahead.

  • In the months ahead expect a Ukraine ceasefire, peak US inflation, China policy easing and Covid ebbing to lead markets

  • Its well worth thinking about what is in the price of financial assets and how prices might change with a fever break.

Jay Pelosky
Jay Pelosky

TPW Founder & Global Strategist

TPW Advisory
8 April 2022
Published byTPW Advisory

After last week’s monthly where we wrote about the Turbocharging of the Tri Polar World, let’s dive back in to the day to day market stuff.

Not much has changed – yields are up, the USD is stronger with DXY breaking north of 100 as the Killer Bs – Brainard and Bullard - fire a twin salvo implying more hikes, higher rates and faster QT. At this point Bullard is a known factor but its impressive how he keeps ratcheting it up, now calling for 300 bp of hikes. Perhaps that explains why stocks sold off initially on his comments but ended the day up… in the price? 

Brainard, long considered a dove in Fed parlance, was a bit more of a surprise; her aggressive take on QT led some to say hmmm, sharply rising rates (fastest hike cycle since 1994) AND faster QT – that may be a cocktail too potent for stocks, especially Cyclical sectors. No real surprise then that Cyclicals have been weak with financials down sharply as BofA’s FMS shows financial fund outflows for the past 7 weeks in a row.

Guided by these policy makers, markets keep ratcheting up how many times the Fed will hike & how fast it will move to implement QT. After stabilizing at 6, 7 rate hikes in 2022 a month or so ago, the Russian invasion of Ukraine and subsequent food and energy price action have led to markets now pricing in roughly 11 hikes this year, suggesting several 50 bp hikes given there are only 6 more meetings in 2022. 

Thus, my earlier view of 2,3 rate hikes in 2022 is likely to be off given the invasion effects on food and energy prices though 11 also seems highly unlikely. I do note the Bloomberg consensus for YE US inflation is 6.2% and I will take the under big time. Recession calls for 2023 are starting to proliferate; Bloomberg notes that 48% of its respondents are now calling for a US recession in 2023. I will also take the under here. 

In fact, I think we are likely coming up to a fever break on this whole price spike, rate forecast spike, equity & bond vol spike process. Here’s why.