Uncle Jay’s Band: Vanguard Sees US Inflation Rising With Gradual China Trade Tension Easing (Possible Rate Increase?)

With inflation expectations rising, will Uncle Jay’s Band intervene even more than they have at recent FOMC meetings?

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IF inflation rises, The Fed may be tempted to raise rates. But will it be enough to justify a rate increase at the December FOMC meeting?

(Bloomberg) — The bond market may be about to get confirmation of its rebounding inflation wagers, according to Vanguard Group Inc. strategist Anne Mathias.

The $5.6 trillion asset manager is among proponents of the view that market-based measures of inflation expectations will extend their climb from a three-year low.

Potential progress in U.S.-China trade negotiations has been a key contributor, along with the Federal Reserve’s signaling on Oct. 30 that it would need to see a significant pickup in inflation before lifting rates.

Five-year breakeven rates — a proxy for anticipated annual increases in consumer prices into 2024 — touched a four-month high of 1.64% last week, with nominal yields surging as well. Developments on the trade front aside, bond traders’ bearish shift may now hinge on inflation data to be released this week.

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Treasury Inflation Protected Securities (TIPS) have been on the rise in 2019 as inflation has been rising.

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And the interest rate volatility cube is lighting up!

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Of course, China could always pull a “Lucy” on the USA in the trade talks.

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What will Uncle Jay’s Band do?

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Get into the groove and let the good times roll!

The Big Squeeze: The Corporate Margin Squeeze And Fed Policy

One of the historic indicators signaling the end of a business cycle (and an impending recession) is US corporate margin squeeze.

Note the red line which is plunging towards recession.

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But can Jerome Powell and The Fed manage to save the day by pumping more QE into the economy to stave off shrinking corporate margins?

how qe works in practice

Loot is right!

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Fish Stew! Momentum Strategies Get Creamed (Or Fish’d) As Atlanta Fed GDP For Q4 2019 Hits 1%

While the S&P 500 and Dow Jones Industrial Average hover near all-time highs, something is brewing .. and it smells like fish stew (or fish tacos at Brion’s Grille).

The Dow market-neutral momentum (blue line) is plunging and it coincides with short-momentum gains (red line).

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Momentum ETFs are seeing a large outflow.

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MTUM, the iShares Momentum Factor ETF, has seen large outpourings of funds.

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I wonder if the Atlanta Fed’s GDP NOW forecast of 1% GDP for Q4 2019 has anything to do with the exodus from Momentum indices?

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Yes, I smell fish stew rather than red roses.

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US Treasury Yield Curve Un-inverts (Can’t Turn The Fed Loose) Sag Gone In Treasuries, Not Swaps

Federal Reserve Chair Jerome Powell has said that the US economy is in a good place, and further rate cuts are not warranted. That is, Trump can’t turn The Fed loose.

Various US Treasury yield curves are un-inverting and are all positive.

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The Treasury actives curve is no longer sagging, but the Dollar Swaps curve continues to sag.

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But in terms of Treasury futures, the volatility for 2 year, 10 year and 30 year (Ultra) contracts   are progressively warping for 10 Delta Puts as maturity increases.

2-year:

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10-year:

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30-year (Ultra):

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Every investor needs The Fed to keep propping up asset bubbles!

Of course, the yield curve can revert to a negative state if … the China trade agreement becomes unglued, Democrats succeed in impeaching President Trump, etc.