Yields Are Headed Higher For Longer… [Dirty Dozen]

Remember the last time you sold a currency at what proved to be the bottom, or bought at the exact top? That wasn’t just bad luck — nor even just foolishness. You and the crowd caused the bottom, or the top. ~ John Percival, “The Way of the Dollar”

In this week’s Dirty Dozen [CHART PACK], we explain why rates will stay higher for longer, why the immaculate disinflation thesis will prove bunk, and why natural gas plays are a good buy here, plus more…

BofA’s Flow Show included the below thoughts on inflation, rates, and the broader market (highlights by me). I agree that the market has overpriced near-term recession risk (we at MO believe that’s a late 23’ event) and are therefore way too hopeful in their immaculate disinflation / Fed cutting 200bps in 23’ / soft-landing narrative.

Below are the various expectations for the Fed Funds rate, with the Fed’s SEP forecast being the most hawkish (magenta line) and the consensus forecast in green. I’m of the belief that the Fed is closer to being right than the others and we’ll see higher for longer rates.

This table shows the 3m annualized subcomponents of the CPI, where we can see that the largest detractors to inflation over the last four months have been energy/fuel related.

This graph shows the implied energy contribution to CPI based on underlying prices. We can see that it was nil in December but is expected to begin picking up again in the Jan print. And with China’s economy reopening along with the US skirting a recession in the 1st half as growth proves more resilient, there’s reason to believe energy/commodities will become a net contributor to inflation once again over the coming months.

The Atlanta Fed’s GDPNow index suggests US GDP will expand +3.5% in the fourth quarter, which is significantly better than the Blue Chip consensus forecast of sub 2% growth.

When looking at all the bearish coincident indicators right now (and there are many), we have to remember that for much of last year, large swaths of the world’s second-largest economy were completely shut down. The full global impact of this is impossible to model but it’s safe to say, that the reversal of these policies is (1) good for economic growth everywhere and (2) bullish for commodity demand.

This chart from @WarrenPies shows that the total number of daily flights from China’s top 20 airports is exploding higher.

Back to our higher for longer thesis… Look, I think bonds will be a great buy sometime later this year. I just don’t think that time is now, quite the opposite. Our composite leading yield indicator (red line), copper/gold (blue line), and lumber/gold (green line) are all sniffing out rebounding growth and suggesting yields (10yr = black line) will soon head back up.

This non-consensus growth rebound is going to hit crowded long positioning + overbought conditions in bonds. Our multi-chart table shows Net Spec positioning for 5y Notes are in their 98th %tile (3yr OI adjusted) and its price is over 2std above both its 20 and 50-day moving averages.

Earlier this month I shared a post about the legendary Wayne Whaley’s favorite seasonality tool, which he dubbed the “TOY Barometer”. What he discovered was that there is a high correlation between the SPX’s returns between Nov 19th and January 19th and the following year’s performance. Unfortunately, the SPX failed to net out in the green and ended the period down -1.7%.

Here’s what the returns historically have been for bearish readings via @SJD10304. The good thing is that this indicator is less reliable for bearish periods, as should be expected. Though this fits with our bias (up to sideways next few months, then back down).

We’ve been writing in these pages about the great technicals and relative strength of India’s Nifty 50 for the last two years (link here). It was one of the few equity markets to end 22’ in the green and it continues to trade well. You can buy a country ETF like INDA but I prefer to play this through the SGX futures.

Here’s the commodities dashboard from our HUD. It’s an easy way to get a quick high-level overview of the positioning and technicals of each market. Some things that stand out; Net Speculative positioning is very bearish in coffee, natural gas, and WTI crude, while crowded long in soybean meal.

The Net Position Delta, which gives us the RoC in that positioning, shows that net specs are starting to lighten up their bearish positioning in natty (which is positive). And both copper and gold are in solid Bull Quiet regimes, which are their most profitable regimes. But, both are very overbought in the medium term (over 2std > 50dma) so some mean reversion is likely in the near future.

It’s been an incredibly warm winter for much of the continental United States. This is what’s sent natural gas spiraling lower, now down over 2.5std below its 200dma. But long-term weather models are beginning to indicate a possible return to a cold winter. We don’t have a weather forecasting edge, but we do take note when everyone is standing on one side of the boat like they are now.

We like Antero Resources (AR) and Sandridge (SD). Both are trading for low single-digit earnings multiples. Both are buying back shares and retiring debt. And both have great long-term charts that have been coiling sideways for the past year.