Is Inflation Curbed Amidst Strong Rebounds?


Is Inflation Curbed Amidst Strong Rebounds?

Monday, January 30, 2023 By Vincent David-Robin

Last week was interesting, since optimism was prevalent. Obviously, with China doing a bit better re-opening, there are a lot of expectations from there; and maybe some additional physical stimulus is coming up as well.

The European market seems to be resilient, despite a potentially hawkish ECB. The BoE may not be known yet.

The US market had a very strong rebound, breaking 4000 on the S&P without any issues whatsoever. There was a very strong rebound on everything that is tech. Beyond tech, there were also meme stocks, art; you name it. Everything that was under the cosh just rebounded with a vengeance. We saw some stocks last week rebounding by like crazy, by about 20% - 30 – stocks that don't really make any money!.

Everything was really getting on a soft landing. But the economy, which still did okay in the US without any danger of the Fed overdoing it – 25 basis points of pricing and the FOMC meeting coming up this week.

So we had a week where maybe there were short positions, or a lack of long positions. In my opinion, it is more a lack of long positions: a kind of FOMO (fear of missing out) again, which we saw last week.

Fixed income markets had also rallied very strongly. It's not quite clear whether it's short covering or people getting long. But again, it's the idea of the Fed being much more dovish. The Fed fund market is a good 50 basis points ahead of the Dow plot or of the SEP. So that provides the enthusiasm.

Obviously, lower fixed income yields – or an equity-positive as far as valuations go – and an overall negative helped emerging markets do very well last week.

But I think it's all premature. We have PC, that was only marginally better. It's not as high as it was a few months ago, but it is still hovering pretty high. So I think it's a bit too early to declare victory on inflation.

We haven't yet seen rents turn. It's not part of PC. It's part of CPI. We've seen some new home sales and existing home sales do a bit worse. It's sketchy that it's still extremely high. It's not quite quiet yet on the rents side; which is something like 58% of the CPI at the moment. So I think it's a bit early to think that the Fed at this point will say, “it's going to be 25, and we reassess.”

We had yen and then summers being a bit more worried that the Fed could do too much. Again highly debatable, frankly. I still think there's a lack of evidence as far as inflation goes. In January, which is usually a bear equities market, we’ve seen a bull market with animal spirit.

I think inflation has been perceived as disappearing. We saw a good level of confidence in equities in terms of the Fed being circumspect. Despite earnings, which haven't been great – they were better for banks weeks ago – but last week Microsoft and Intel were very, very poor. Intel is a multinational that is exposed globally; not only in the US. So it didn't do very well.

The stories about Russia and Ukraine are completely discounted for at the moment. Nobody cares about that anymore. So you see, the mindset is more on to the upside than the downside.

This week I think will be quite different because we have the FOMC and the CB. So it could be a wake-up call for participants. Already this morning we've seen markets to be slower. There was an article in Yeti earlier, stating that maybe investors are being a bit too optimistic, and should be wary of inflation not disappearing, and for central banks to just take further action.

My guess is that this week we'll see markets stray down; either a little bit, or maybe quite a bit. I still think the Dow and the Dollar index could rise further. We're at about 116. It can go back to 105, 106, 107, possibly. Maybe a bit too much, but just the fact that it turned (if it does turn) will be sufficient. It may have an impact on commodities and emerging markets.

From fixed income as well, I expect yields to be somewhat higher this week. Pre-FOMC, or even after FOMC, you will need a very, very dovish par for fixed income to stay where it is. Even though, as I had said, it is 50 basis points head of the Dow plot.

So I think we could see a week whereby equity markets settle by 3% - 5%. Not more than that, I think. But 3% to 5% is highly feasible, in my opinion. Then we will reassess. At present, we would like slightly higher yields in all things because we're stuck on profits, so we would like to redeploy the money. We would like slightly lower equities in share as well, because we are under-invested. That would allow us to get back in.

We'd have to think where we can get back in. A small idea, for instance: we could try to release in Volkswagen a little bit because we don't have a lot. But we'll have to see when we get there. We missed Apple. They're also at 124. It's just a good example: Apple rebounding so much. Look at Tesla! The rebound from Telsa has been absolutely immense, despite sales being disappointing. So you see, there's been a strong rebound last week.

I think this week it will be a different game. I guess it's all a bit lower on equities. I think Commodities will stay as they are. Demand is there, especially if China reopens, industrial metals should benefit a bit more. But if the dollar starts strengthening, then it's just counter-weight. So I guess commodities are goin to stay where they are, but don't do much more.

As far as precious metals go, I think they've had their run. I don't see them rising very strongly this week. We continue to reduce exposure to gold and silver. We'd like, obviously, to revisit, but at low levels. We have gold at 1940 at the moment. I think 1875 or thereabouts would be nice to revisit. I think it's not going to go much higher than that. If anything, I see it a bit lower. But again since the start of he year, we are looking at relatively small moves, and I think it's going to continue treading tactically for a little while. We have had a crazy rebound in tech and meme stocks. That's been a strong move. For the mainstream stuff, I think you can expect moves of 3% to 5% tops one way or the other at the moment. That's the expectation I have at the moment in price movements.

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