A Not-so-Trustworthy Bounce

East vs. West

*BIDEN SIGNS US NATIONAL SECURITY LEGISLATION PROVIDING AID FOR UKRAINE, ISRAEL

*BIDEN SIGNS TIKTOK DIVESTMENT-OR-BAN BILL INTO LAW

Two separate landmark bills were passed in Congress this week. The first was further US defense support for Israel and Ukraine, while the 2nd was a meaningful step toward the US banning TikTok.

What are the underlying themes here?

East vs. West. A multi-polar world.

The US is doing all that it can do suppress the development of Russia and competitive development in China. Whether its technological, cultural, or military related - the US is clearly shifting away from its ties to China.

This dynamic will continue to be inflationary.

Bonds Yields Keep Climbing, Yellen on Deck

*U.S PCE PRICES (Q1) ACTUAL: 3.4% VS 1.8% PREVIOUS

Although it is backwards-looking data, price indexes within the GDP report this week pushed bonds yields further to the upside. 10-year Treasury yields climbed to the highest level in more than 5 months after the GDP report.

However, one of the most watched macro events is coming up this week. The Treasury’s Quarterly Refunding Announcement (QRA). Many are looking for Yellen to shift the composition of Treasury issuance towards bills, which could stifle the pressure on long-duration assets.

With bonds yields hitting multi-month highs, equity risk premiums are now at 20-year lows. Equity risk premiums in the chart above are defined as the earnings yield of the S&P 500 less 10 year Treasury yields.

Bonds haven’t been this attractive on a yield basis relative to equities since 2004.

Despite yields continuing to climb, market rebounded sharply higher over the past week. The bounce doesn’t seem too trustworthy with many of the forces driving equities lower (rising interest rates, lower liquidity, tensions in the Middle-East, etc.) having not dissipated.

The simple fact is that the percentage of S&P 500 stocks above the 50-day moving average fell to the lowest level since last October and equities became oversold in the short-term and were due for a bounce.

Yellen’s decisions this week will be something that can make a rally more trustworthy…