2022-09-08

ECB Hikes, Powell the Matador Up Next

The ECB hiked 75 basis points today. There were spikes in equities, the euro and bonds, and then it faded. The question for today is whether this pullback hints at continuation of the prior three week trend or if this is a buying dip in a developing countertrend rally. I'm long TLT coming into the day, with a tight stop. Possible double bottom in play.
The spread between US and China govt bonds broke lower this week, but not Japan. The 2s10s has been rallying, but that is not a long-term positive sign because it's coming via the long-end rising faster than the short-end. Prior recessions (after 1982) saw a soaring spread because short-term rates fell in recessions. For now, the spread isn't as interesting as what bonds themselves are doing.
ZeroHedge was talking about a snap reversal in yen yesterday. It's not very actionable, but that's ok. Sometimes it's good to be reminded of potential trades even when the setup is not quite baked through. Looking at CNYJPY, one of two things is coming: a pullback in the dollar and reversal in charts like CNYJPY or something like July 1997 and Setpember 2008.
Bear markets are strange because it pays to have a very long-term macro focus, but the news feed is wild because years can be compressed into days. Rallies that take months to unfold in bull markets can happen in hours. Right now I'm lightly positioned waiting for reentry on shorts, and maybe go long if the rally has legs. Zooming out though, the Federal Reserve is still trapped. Prematurely declaring victory over inflation is a very expensive mistake. They must err on the side of overtightening. A recesssion is already underway and it will probably get worse. The Fed is going to take flak for that. They have an excuse though: we were fighting inflation. Everyone told us to fight the inflation. Failure is both inflation and a recession. That's why I expect stocks will tank around the time ZB starts moving higher, but the current moment might fool a lot of bulls who misinterpret what the bond market is saying.

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