The Week Ahead

Volume 24

Good Morning,

I’m not sure a recap is necessary - I think we all know what happened this week!

The greenback full steam ahead, possibly one of the most overcrowded trades I have seen in a long time.

I think Jerome Powell made it very clear what the FOMC wants, they “are strongly committed to bringing inflation back down to our 2 percent goal” and they “have both the tools [they] need and the resolve it will take to restore price stability on behalf of American families and businesses” - IE use SPX and 2yr as policy tools. Oh and sell bonds all the way long the curve to tighten conditions as much as possible. I shall come back to the Fed later in my post.

The sharp sell off in GBP/USD was clearly aided by the dollar however at this point I think the pair breaking down close to parity is very interesting considering rates are going to be 4% in the UK very soon, with a 100bps hike being priced in for November. I do not doubt that we could see an emergency rate hike before that November decision.

We have seen currency intervention from the BoJ and I expect soon we will see some sort of intervention from the ECB.

As I mentioned on Twitter, central bank induced recessions are short and sweet by nature and I really do not see the Fed being able to follow through on the dot plot.

As per, my previous posts regarding rates and the yield curve inversion…

…I have started to deploy more capital.

I think Jay’s intentions on Wednesday were clear and actually necessary - scare the market, shock the market and burn the market. They don’t want guys borrowing long at cheap rates anymore. As a result of Jay’s comments, markets were in turmoil and there are rumours in my circle that pension funds are getting smashed and stopped out. By nature they are long only … a complete correlation nightmare - long bonds, long stocks whilst in a time of high inflation one can see stocks down, and bonds down more. The yield curve inversion of 2s10s is deep sure, but it’s still most likely got more to go - potential it can see -100bps. As I said in prior posts, I want to see the 2yr @ ~4.00% and the long end come down towards 3%, before I deploy a lot more.