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Tuesday, January 31, 2023

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Gold Jumps, Dow Dumps YTD Gains As ‘Hard Landing’ & Debt-Ceiling Fears Surge

The Fed has a problem – as the ‘economy’ trends towards recession, the ‘labor’ market is refusing to take any notice of monetary policy and hawkish jawboning…

Source: Bloomberg

The risks of a hard-landing recession are soaring as the yield curve inversion (Powell’s favorite indicator is the 3m bill yield 18 m fwd spread to the current 3m Bill) deepens to record lows…

Source: Bloomberg

And on top of that, the debt-ceiling fears are back, with a notable kink appearing in the T-Bill curve around June/July

As Jeffrey Frankel opined, ‘this debt-ceiling fight may be different’:

As Washington gears up for yet another partisan showdown over whether to raise the debt ceiling, with congressional Republicans seeking concessions from Democrats in exchange for their votes, many are understandably nonchalant about it. Americans feel they have seen this movie before, and the story usually ends with the bickering politicians reaching a last-minute compromise. So, no need to ring the alarm bells. But this reboot could have a different, tragic ending. In the 1955 movie Rebel Without a Cause, James Dean’s character survives a deadly game of “chicken” by jumping out of his car at the last moment while his rival miscalculates and drives off a California cliff. With the US economy barreling toward the cliff’s edge, it is clear that intransigent Republicans have no intention of hitting the brakes. This could mean a once-unthinkable US government default. Unfortunately, letting Republicans drive the US economy off a cliff may be President Joe Biden’s best option right now. But the US still has at least five months to jump out of the car… By then, hopefully, crashing securities markets, outraged beneficiaries, and shifting voter attitudes would finally persuade enough holdouts to raise the debt ceiling. In the meantime, we have no choice but to let this game of chicken play out.

But judging by the market’s sudden bid for USA Sovereign credit risk protection (back near record highs), we suggest things are a little more serious this time…

Source: Bloomberg

Piling on, Fed vice-chair Brainard piled on noting that “rates need to be sufficiently restrictive for some time” and claimed that financial conditions have tightened significantly (true but the last 3 months have seen financial conditions ease back dramatically)…

Source: Bloomberg

Futures drifted lower overnight, accelerating losses during the European session and then again accelerating as the US cash markets opened. The European close, coincided with Fed’s Brainard’s comments and stocks rebounded but all the majors ended the day in the red for a second day…

The Dow has erased all of its gains YTD…

The S&P 500 opened back below its 50DMA, rallied up to it but stalled and sold off into the close…

The Nasdaq also broke back below its 50DMA today…

“Most Shorted” stocks tumbled for the second day in a row…

Source: Bloomberg

Treasuries were sold today – though only modestly (with the whole curve 3-4bps higher). The whole curve remains lower in yield on the week though, led by the belly…

Source: Bloomberg

The short-end (STIRs) shifted modestly hawkishly today…

Source: Bloomberg

The dollar trod water most of the day but limped lower after Europe closed…

Source: Bloomberg

Bitcoin rallied back above $21,000 today…

Source: Bloomberg

Notably, bitcoin and big-tech have de-correlated in the last couple of days…

Source: Bloomberg

Oil prices rallied on the day, despite a major crude build, as China re-opening fears trumped US domestic recession fears today…

Gold surged to new cycle highs above $1930 – the highest since April 2022…

Finally, the market remains almost 75bps (3 x 25bps) more dovish than The Fed for where rates are at the end of this year…

Source: Bloomberg

Will The Fed fold? Again?

 

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