Friday, January 14, 2022

Morning Note: "Inflation's a Feature, Not a Bug"

Well, barring something special to the upside in today's session, US equities look to be finishing the first two weeks of the year in the red. Notably so for the indices sporting significant tech sector exposure.

That said, this morning's pain is being felt primarily in the Dow, which sports notable financial sector exposure. As JP Morgan (Dow member [down 4.8% as I type] and Citi reported earnings that disappointed on the trading revenue front. 

I'll just say that if a lack of volatility cramped the big banks' trading style in 2021, 2022 looks to remedy that one in a hurry.

With regard to what typically drives the trading in financial stocks, interest rates, and to what generally drives interest rates, inflation, here's Louis Gave of research firm Gavekal making sense in a recent Macro Voices interview:

"So, yeah, sure, at the margin, they'll move a little bit on the tighter side. But let's not kid ourselves that they're ever going to get ahead of this inflation curve, for a very simple reason; that inflation is not a bug, inflation is the feature.
Every policymaker everywhere in the world is following inflationary policies, because fundamentally, that's what they want. They want the inflation to deal with the big government debt problem, because that's how you deal with it. So, we're always going to have monetary policy that's way behind the curve. Again, that's not a bug, it's a feature."

 Asian equities struggled overnight, with 10 of the 16 markets we track closing lower.

Europe's getting hammered so far this morning, with all but 3 of the 19 bourses we follow in the red as I type.

US major averages are mixed: Dow down 279 points (0.77%), SP500 down 0.31%, SP500 Equal Weight down 0.66%, Nasdaq 100 up 0.20%, Nasdaq comp up 0.05%, Russell 2000 down 0.41%.

The VIX sits at 20.48, up 0.84.

Oil futures are up 1.11%, gold's up 0.09%, silver's down 0.15%, copper futures are down 2.23% and the ag complex is up 0.46%.

The 10-year treasury is down (yield up) and the dollar is up 0.22%.

Led by energy stocks, AMD (chip maker), SOXX (more chip makers), MP (rare earth miner) and ag futures -- but dragged by Disney, water stocks, financial stocks, uranium miners and Viacom/CBS -- our core allocation is down 0.17% to start the day.

In this week's video commentary I commented on the seemingly Pavlovian response among some dollar watchers in their associating of higher interest rates with a higher dollar. Here's Ashraf La├»di in his must-read (for anyone desiring to understand currencies) book Currency Trading and Intermarket Analysis emphasizing my point: 

"Determining why foreign exchange rates move the way they do may seem a far too ambitious and challenging task, as it requires making sense of an unlimited array of factors ranging from fundamentals (macroeconomic changes, central bank actions, capital markets changes, corporate/dealer transactions, political and geopolitical factors, and news reports) to technicals (price charts, momentum, oscillators, moving averages) to pure flow-driven developments."

Have a great day!

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