As promised, I wanted to provide an update on markets after this week’s events from Jerome Powell (FOMC) and Janet Yellen (Treasury Quarterly Refinancing).
This would give us some indication of how the Feds and US Treasury are responding to (a) recent weakness in stock markets, and (b) sticky US inflation.
I don’t usually do this, but let’s start with the price action.
And then we’ll move on to the fundamental discussion.
This is an FH Premium article written this week.
I wanted to release it to all readers so you have an insight into my latest macro views.
If you find this useful – do sign up for FH Premium for more premium articles like this.
I share my full stock / REIT watchlist, and personal portfolio (with weekly updates) on FH Premium.
Market Price action is terrible – suggesting short term caution
Generally speaking, market price action has not been pretty.
There has been a significant loss of momentum in key markets, and a lot of key support levels have been broken.
This would suggest some caution is warranted in the short term.
Bitcoin / Crypto frontruns traditional stock markets – and is signalling caution
I’ve shared in the past how Bitcoin / Crypto frontruns traditional markets by about 2 – 3 weeks this cycle.
For example in Oct 2023 Bitcoin bottomed before stocks – which allows us to use Bitcoin as an early warning for stocks / REITs.
The Bitcoin charts are not pretty.
2 weeks ago I shared that $57,000 – $59,000 is the key range I would be looking for.
That range has been hit this week.
The support has held for now though, so if this holds it would be a bullish sign.
But the fact is that Bitcoin remains in a downtrend, which does not signal well for risk assets.
Crypto ex Bitcoin and Ethereum tells a similar story.
Yes the support has held for now, and if this holds would be a good point to accumulate.
But again the short term downtrend remains intact.
US Stock Markets – S&P500 down 5% from highs
Here’s the S&P500.
4800 would mark a 10% drawdown from the top.
Where we are today is about a 5% drawdown from the top.
And it remains to be seen if the short term downtrend will continue, or reverse higher.
US 10 year yield remains high – but is this a turning point?
US 10 year yield remains above the 4.5% danger zone, which is not good.
What is good though, is that 10 year yields seem to have peaked around 4.7% for now, and dropped to 4.6% after this week’s Treasury and Fed announcement (more on this below).
If 10 year yields peak and reverse, that could be bullish for stocks and REITs.
Singapore REIT prices remain near lows
REIT prices have rebounded a little, but as a whole remain very close to the recent lows.
Oil prices have started to drop – which is bullish for stocks / REITs
The final chart I wanted to highlight is oil.
Oil seems to have peaked at low 90s for now, and has dropped back to 83.
This is actually pretty bullish as lower oil prices has profound knock-on implications for inflation going forward, and could help facilitate Fed rate cuts.
What was the big fundamental news this week from a macro perspective?
This was a pretty big week from a macro perspective.
We had:
- Janet Yellen – Treasury Quarterly Refinancing
- Jerome Powell – FOMC
- US Inflation data
Janet Yellen – Dovish or Hawkish for stocks / REITs?
Treasury Quarterly Refinancing
The Treasury Quarterly Refinancing sets out how the Treasury plans to fund the borrowing needs of the US government.
This matters because the US government is running a huge budget deficit.
If they fund it all via long term Treasuries – you’ll see long term interest rates shoot up (like they did in mid 2023, which is bad for stocks / REITs).
If they fund it mostly via short term T-Bills – you’ll see long term interest rates drop (like they did in late 2023, which is good for stocks / REITs).
Note: I’ve been asked to clarify on the dynamic above by a FH Premium subscriber. Please see illustration below:
Let’s say Treasury needs to borrow $100.
If they borrow $80 in Treasuries and $20 in T-Bills, that’s a lot of Treasuries supply – so price drops and yields go up.
If they switch to say $80 in T-Bills. That’s very little Treasuries supply – so price goes up and yields drop.
It’s what Yellen did in Oct 23 that sparked the big drop in yields.
So by playing around with how much T-Bills vs Treasuries, Yellen can kind of manipulate market interest rates – which undermines what Powell is doing. Hence the need to look at the Fed and Treasury holistically these days.
Treasury issuance is flat – and will stay flat for the “next several quarters”
2 big points announced by the Treasury this week.
First – is that the amount of Treasury issuance for the next quarter will stay roughly flat.
Current levels of Treasury issuance is very high, and keeping it there is not a good sign.
That’s where the second point comes in –the “Treasury does not anticipate needing to increase nominal coupon or FRN auction sizes for at least the next several quarters.”
So yes… issuance will remain at current levels which are very high, but at least it’s not going to increase any further from here.
So while keeping Treasury issuance at current elevated levels is definitely not a good sign.
Coupled with the forward guidance I would say it’s not outright bearish.
Jerome Powell – Dovish or Hawkish for stocks / REITs?
There were 2 big announcements from Jerome Powell this week:
- Interest Rates
- Quantitative Tightening
Interest Rates – Rates hikes unlikely, next move is still cut
Remember how before this the market was pricing in a slim chance of another interest rate hike by Jerome Powell?
Well Jerome Powell completely shut that down this week:
“I think it’s unlikely that the next policy rate move will be a hike. I would say it’s unlikely“.
No interest rate hikes going forward, next move from Powell is still going to be an interest rate cut.
This in itself is bullish, as it cuts out the tail risk of further rate cuts.
However, more progress on inflation required before interest rate cut
When will that interest rate cut happen?
Here’s what Powell had to say:
“In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective“.
“For us to begin to reduce policy restriction, we want to be confident that inflation is moving sustainably down to 2%. For sure, one of the things we would be looking at is the performance of inflation. We would be look at inflation expectations. We would be looking at the whole story. Clearly, incoming inflation data would be at the very heart of that decision.”.
To sum up – yes, the next move from Powell is still going to be an interest rate cut.
But Powell wants some clear evidence inflation is coming down before cutting.
Quantitative Tightening reduced from $60 billion a month to $25 billion a month
The big news though, is the change to Quantitative Tightening (QT).
Before this, the Feds were “selling” $60 billion in Treasuries a month.
But:
“Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion“.
This was quite a bullish development from Powell.
US Inflation remains very sticky
On US inflation – I could pull up any of the different metrics released the past few weeks.
But all tell the same story.
US inflation bottomed in Q4 2023, and started to reaccelerate in Q1 2024.
This has created big problems for the Feds looking to cut interest rates.
What does this all mean for stocks / REITs?
Putting everything together.
US Treasury will keep Treasury issuance at elevated levels, but it will not increase going forward (future increases is via T-Bills).
Feds will not raise interest rates any further, but will keep rates here until inflation comes down.
BUT – they will ease back on Quantitative Tightening, from $60 billion to $25 billion a month.
Market is now only pricing in 1 interest rate cut in 2024.
Personal View – Not as bullish as late 2023, but not outright bearish either
I think it’s clear that this is not as bullish as late 2023 when both Yellen and Powell flipped dovish.
So if you’re expecting a Nov – Q1 style rally in stocks and REITs the next few months.
I don’t think we’ll see that unless something changes on the inflation front (or if something breaks that forces emergency Fed action).
But it’s clear that the US Treasury and Central Bank have gone out of their way to avoid adding to the market pain.
US Treasury (Yellen) has offered forward guidance on no increase in US Treasury issuance going forward.
Central Bank (Powell) has (a) confirmed no further rate cuts, and (b) reduced QT quite drastically from $60 billion a month to $25 billion a month.
So the key policy makers are going out of their way to avoid a market crash the next couple of months too.
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What will Powell / Yellen do in a US election year – to support stock markets?
The funniest part was when Powell was asked by a reporter if he would take elections into consideration when setting interest rates.
This was his response:
“We just don’t do that.
You can go back and read the transcripts forever.
This is my fourth election, fourth presidential election here.
Read all the transcripts.
See if anybody mentions, in any way, the pending election.
It just isn’t part of our thinking.
It’s not what we’re hired to do.
If you start down that road, I don’t know how you stop”.
Yes I get that there was nothing else he could have said as the Chairman of the most powerful Central Bank in the world.
But c’mon – who are we kidding here.
The past 18 months, Yellen and Powell have combined to play all kinds of funky games that propped markets up and prevented a sustainable decline in inflation.
When Silicon Valley Bank went insolvent in early 2023, Powell stepped in to bail them out.
When US 10 year rates rose to 5.0% in mid 2023, Yellen stepped in to bail them out.
With this kind of track record, it’s hard to see why that would change as we head into the US elections.
Policy Mistake by Powell / Yellen?
In late 2023 I said that the pivot from the Feds was a big mistake.
It came too early in the cycle, before inflation was durably put down – and would lead to a resurgence in inflation.
That’s exactly what we’ve seen.
And today, I think Powell is making the same mistake again.
By doing all they’re doing to prop the markets up in an election year.
They’re just kicking the can down the road.
And setting us up for big problems in 2025.
This path we are going down, truly makes me fear for a 1970s repeat – with waves of inflation and rate hike cycles.
Will I buy stocks / REITs now or wait?
But hey – I’m not the guy setting policy.
I’m here to trade the market as I see it, not how I wish it to be.
Short Term caution – But if current levels hold it could be a good accumulation zone
Looking at all of the above, I think some short term caution is required.
Price action has lost significant momentum, and many key markets remain in a downtrend for now.
Macro wise, per discussion above – it doesn’t look outright bearish.
But neither is it late 2023 level of bullish.
If current support levels hold though, this could be a good range for accumulation.
Mid Term Bullish?
The Mid Term is tricky.
It all goes back to how policy makers respond.
Let’s say we are in 2H 2024.
The global economy continues to slow due to higher US interest rates.
Note that for as long as the Feds don’t cut, no other central bank can cut without risking currency depreciation (look at Japan).
How does Powell react in that scenario?
Does he cut anyway to boost Biden’s re-election chances?
Does he stick to his guns to crush inflation and go down as Paul Volcker 2.0?
Based on what we’ve seen from Powell the past 18 months, I would say the former is more likely.
In which case any short term sell-off would be a buying opportunity.
“Comfortable” cash levels continue to make sense in this climate
That being said, I think you just have to recognise that a lot of things can go wrong.
Powell refusing to cut interest rates in all of 2024 is going to produce a very different outcome from one where he cuts twice.
Which is why I continue to say that in this new 2020s paradigm of sticky inflation / higher interest rates.
“Comfortable” cash levels continue to make sense.
I mean look at the latest Singapore Savings Bonds.
You’re getting paid 3.26% first year, and 3.33% for 10 years – absolutely risk free.
Which you can redeem any time with zero capital loss.
In a climate like that, coupled with all the macro volatility, “comfortable” cash levels makes sense.
As to what is comfortable, each investor needs to decide this for him/herself.
What stocks / REITs would I buy?
At the same time, if Powell cuts into a resilient economy, he could well inflate an asset bubble.
So you want upside exposure to risk assets as well.
My full thoughts on individual stocks / REITs are shared on FH Premium.
Asset classes I am keen to pick up are:
- US Tech / Bitcoin / Crypto
- REITs
- Gold
- Commodities
US Tech / Bitcoin / Crypto
US Tech / Bitcoin / Crypto will benefit from any liquidity injections in a US election year.
This gives the upside potential to my portfolio.
REITs
REITs – no doubt a rise in long term interest rate will be bad for REITs.
But the worst of the short term interest rate increases are already behind us.
Even if short term rates stay at these levels, if you pick up high quality REITs at the right price you should still have a decent margin of safety, and good dividend yields while you wait.
I would want to stick to high quality real estate though, US/Europe/China real estate looks very uncertain going forward.
Full list of stocks / REITs I am looking at, and target prices, are shared on FH Premium.
Gold
I wrote a long article on Gold for FH Premium subscribers this week.
Long story short, gold is an interesting hedge in this new paradigm of currency depreciation, and an interesting alternative to cash.
I myself hold a decent allocation to gold, and that has proved to be a very powerful diversifier in 2024 so far (up 11.7% on my gold position).
Commodities
Commodities is a wildcard.
If there is an economic slowdown, they will underperform.
But look at the above and I think there is a good chance inflation will stay with us for a while.
This makes some commodities allocation critical as an inflation hedge.
Meanwhile there are certain markets like Copper and Uranium that are in structural demand-supply deficits, that would take years to work out.
Again – the full list of stocks / REITs I am looking at, and target prices, are shared on FH Premium. I will provide updates on FH Premium as and when I add / sell my positions for my personal portfolio.
This is an FH Premium article written this week – and will not be updated going forward.
I wanted to release it to all readers so you have an insight into my latest macro views.
If you find this useful – do sign up for FH Premium for more premium articles like this.
I share my full stock / REIT watchlist, and personal portfolio (with weekly updates) on FH Premium.
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Hello FH, thoughts on China? I’ve been seeing chatter on KWEB outperforming QQQ this year, and it looks set to continue (from a technical perspective). apologies if you’ve already covered this in another article.
my only other comment would be on the US10Y yield, it’s still in the uptrend channel starting 1 Feb, and even with yesterday’s drop the higher lows are still intact, so I don’t quite see them peaking yet. but if they do get to 5% again that’s a level where I feel comfortable going balls deep into TLT.
Hi Jenny, are you a FH Premium subscriber? Will likely write on KWEB / China tech in the next article.
On US10Y – agree that it’s not clear whether the peak is in. We will see the next few weeks.
No not yet. I’m considering it though 🙂
Haha alright just wrote the article on FH Premium: https://www.fhpremium.com/
Do sign up if you’re keen, if not I might try and release it here after a month or two.
It’s not easy to summarise as the view is somewhat nuanced, but I like the risk-reward, as long as you size it well and know what you’re getting into.
Guess we have our answer now. US10Y has indeed peaked, great call Horse.