The Week Ahead
Volume 77 - A premature hurrah, return of the carry
A good head and a good heart are always a formidable combination.
-- Nelson Rolihlahla Mandela
What a week…
Last week… Performance wise for me - mediocre. While I can’t say I enjoyed most of it as I didn’t understand or get behind it, I will remember that one for the rest of my life.
I still think that the FOMC Presser was neutral with a more hawkish tilt, but the market clearly took it as dovish, and with data weaker, you had a home run for a face-ripper.
As I said in the middle of the week, the rally was counter-productive… the recent tightening in financial conditions equated to ~75bps of hikes, but with Jay finally acknowledging the tightening in FCI helping the Fed’s crusade against inflation, markets quickly began to deliver a reversal in that tightening which should in-turn increase the probability of one more hike. So it’s worthwhile keeping an eye on long-end yields, as falling too quickly and too far is a concern. With a light week for data and plenty of Fed speakers, I can only assume we will see some “verbal tightening”/”verbal YCC” so financial conditions don’t ease too much.
What caused the sharp decline in yields over the past week? 1) A home run of weaker data. 2) Positioning. 3) The refunding meeting showed lower than expected duration supply.
What to watch this week - Treasury auctions and Fed speakers.
With rate vol coming off, it provides opportunities in FX, so I shall begin with that, followed by single stock, index & vol. And then fixed income.