If you can't beat 'em, join 'em?
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We have been hammering the point about the Treasury and Fed decisions this week for some time now, and for a very good reason. These two events were the key drivers of macro flows during much of Q3 and Q4 last year.
Last Saturday we said that we are bearish if following conditions occur:
If Treasury increases coupon purchases to above $400bn. This is the crucial assumption, as it once again acts as a catalyst for a bond and equity sell-off.
If FOMC takes the March cut off the table, and pushes the QT taper into the second half of the year. Even if FOMC is not particularly hawkish, just mildly.
Finally, don’t forget earnings. If an earnings beat by Big Tech is followed by lackluster price action, then a sell-off becomes even more likely.
On Wednesday, it seemed like all three came true! And we profited immediately from it on the day, primarily due to BASON also sending a sell signal.
The Treasury is pushing more long bonds in Q2 ($447bn net), which will act as a headwind for bond prices, and should push yields up. At the same time, during FOMC’s Q&A Powell did, in fact, say that a March cut is unlikely. This triggered another round of sell-offs on the day (we published the comment before Powell said this explicitly). The March rate cut probability dropped from 55% before the speech to 35% after it, and has ended Friday down at 20% (after a hotter than expected jobs report). Markets are now pricing in 5 cuts for the year, not 6.
And to top that off, MSFT and GOOGL had a decent earnings report on Tuesday after close, and yet they were punished, thus materializing the third condition: a beat followed by lackluster price action.
By the end of Wednesday, the bears were looking in control, and a correction over the next month seemed inevitable.
But then on Thursday, a complete reversal. Nothing like price action to invalidate a thesis, huh?
Markets shot up 1.2% on Thursday, reversing all the losses from FOMC day, and then another 1.3% for SPX, 1.7% for NDX on Friday for yet another all time high. It was like nothing happened. The entire macro thesis resting upon key fiscal and monetary policy decisions was invalidated in just a few hours. Or so it seems.