Author: jsc

Tomorrow’s CPI report will undoubtedly have an impact on markets.  From a longer-term perspective, inflation rates impact equities/equity valuations through four main inputs.

The fundamental landscape remains solid with bond yields, commodity prices, PMI data and earnings revisions keeping the balance of risks aimed higher.  Incoming macro data has also been supportive with the US Economic Surprise Index advancing well into positive territory. 

The global cyclical recovery and reflation theme will likely be the dominant market narrative if the Omicron variant turns out to be a non-factor and China’s credit impulse improves as some expect.

The CBOE Volatility Index (VIX) closed above it’s 50, 100 and 200-day moving averages every day last week.  Increased volatility commands a higher equity risk premia/lower acceptable multiples.

Government entities, Pharma and Health Care providers all cite a 2-week timeline to analyze the new variant.  Friday’s outsized move was helped by thin holiday liquidity and today’s buy-the-dip reaction is fairly typical.

The same positioning indicators have Energy as the most crowded sector short, with long positioning down ~90% over the last decade.

The sector with the least crowded positioning at the moment also happens to be a good inflation hedge.  Underinvestment in the Energy sector is the understatement of a lifetime.

Higher real yields (nominal yields – inflation expectations) follow recent attention on easing supply bottleneck pressures on rising Asia vaccination rates and efforts to dwell times at LA/Long Beach ports.

The NASDAQ 100 (NDX) has led all other major indices this week as 10-year real yields have remained anchored (now -1.15) near all-time lows at -1.19.

The S&P 500 (SPX) should be upwardly biased into year-end as hedge fund managers avoid negative P&L on shorts.