Monday, 15 October 2018

Reasons to Doubt a Continuation of Last Week's Selloff (Outline)

A few factors to consider before committing to the bear side.

1. majority of market is on high alert/risk off and had a lot of time to settle into their thoughts over the weekend. They all fear a Monday gap-down and likely have stops in place to limit any potential downside in their portfolios.
2. Santa Clause Rally - we are currently in prime time for a holiday-fueled rally in stocks.
3. Trump leveling up public criticism of Fed policy.
4. The Perma-Bears are out in full force with more conviction than ever. From the Schiffs to the Stockmans - they've all published articles and videos over the weekend prophesying that last week's move is just the beginning of the end. This usually marks a near-term bottom. I wouldn't enter any new shorts while the bears have their chests puffed out.

1. October's CPI came in 50% below forecasts. The CPI is the Fed's primary tool for gauging near term inflation, and a print 50% below expectations is not bullish for rates.
2. Jobless claims came in 7K higher than expected. One data point does not a trend make, however, it is technically inconsistent with a tightening labour market.
3. Strong dollar exacerbating slowdown in global growth. Since the Fed's dot plots imply a gradually strengthening dollar, current interest rate policy risks triggering a wave of emerging market debt defaults. Ironically, a slowdown in global growth itself ignites a flight to safety, strengthen the dollar further from here, irrespective of a change in monetary policy. A strengthening dollar also puts a dent in corporate earnings, which isn't conducive to a positive economic outlook or higher asset prices.
4. The US is already paying the third highest interest rate in the G8, and is one of only three countries paying positive real rates on 10 year money (0.513%). The other two G8 nations without negative real interest rates are Italy (1.81%) and Russia (5.41%). Every other G8 nation is currently borrowing 10 year money at a negative real rate; i.e., they're borrowing $1 and paying back less than $1 at maturity, after discounting for inflation. If Fed policy continues to diverge from other major central banks, then rising debt servicing costs could become the most important fiscal issue in the US - something Powell likely wants to avoid at all costs.