Earthquake? The Sound of Reflation

The Commodity Bull Market Has Begun

Commodities have been perking up over the past few weeks. Metals and oil have been reacting to the combination of rebounding global economic data (namely in manufacturing) and central banks which continue to point to easing. While the true commodity bottom was in March 2020, the ratio of commodity prices to the S&P500 is still near all-time lows. There is a lot of room left on the run-way…

Economic Growth Accelerating

*SPAIN MARCH SERVICES PMI RISES TO 56.1; FORECAST 55.5
*CHINA CAIXIN SERVICES PMI MAR: 52.7 (EST 52.5; PREV 52.5)
*US ISM MANUFACTURING PMI ACTUAL: 50.3 VS 47.8 PREVIOUS; EST 48.3

Global growth is rebounding! China’s is injecting significant stimulus into the financial markets just as Europe and the US manufacturing base are beginning to see some momentum. The US ISM Factory Index printed its first expansion since September 2022 last week.

BIDEN TO MAKE NEW ATTEMPT AT LARGE STUDENT LOAN FORGIVENESS:WSJ

Importantly, the fiscal spigot is still flowing and the Fed doesn’t want to tighten. As we discussed in our last note, this creates a large right (inflationary) tail.

Janet Yellen and the US Treasury are issuing more t-bills at an accelerating pace. This all shifted at the November QRA (Quarterly Refunding Announcement). Risk-assets clearly got the signal that the Treasury didn’t want long-end issuance to disrupt financial conditions, and the significant easing throughout the past few months is now beginning to show up in economic data.

Fiscal is stimulative. Treasury issuance is stimulative. Growth is rebounding. Fed is pointing to cuts. That is a recipe for disaster for long-end bond prices...
US 10-year yields have climbed to the highest level since November.

The correlation between US stocks and bonds over the last 3 years (0.7) is the highest since the late 1970s. This is part of the reason why stocks have begun to roll back lower. This should serve as another reminder that the market is NOT the economy. Too much growth is not good for equities. Just look at the 1970s, markets were basically flat for a decade while nominal GDP massively expanded.