Good Tuesday AM (2/2/22),

Interesting commentary from Dan Rawitch below. I typically agree with him but in this case, I think the reason that bonds are not doing better today was that Germany took a stand against Russia (and more importantly the Russian oil pipeline). That sent oil prices up, up, up and with oil being inflationary, it is hurting the bond market. In truth, it is likely a combination of several factors. The outcome is most asset classes are being hurt (or hammered). Equities, crypto, bonds all hit hard. Oil and gold are holding up well.

At the moment our Russian/Ukraine bond rally is fizzling. These black swan type events can be very tricky. Often times the flight to safety into bonds is the strongest at the onset, when the event is first floated from the media. As reality sets in, the fear in the market tends to subside and we see less of a move to bonds. Make no mistake though, this is not over and there will be waves of extreme selling in stocks and buying in bonds but the market never makes it easy to predict. At times like this, it’s a good idea to keep your pipeline locked and try not to guess what Russia will do, and then guess what the market will do about Russia does. Whew, that’s enough to give you a headache. To be clear, I do believe rates may improve over the next couple of days but on Friday we get the PCE numbers and those could take away all the gains.

Home-price growth surged to a record in 2021, as low mortgage-interest rates prompted buyers to compete fiercely for a limited number of homes for sale. The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 18.8% in the year that ended in December, unchanged from the prior month. The calendar-year increase was the highest since the index began in 1987.

Last, a good piece from Bloomberg on how the Fed raising rates will (as previously discussed), likely cause them to drop them in the not too distant future (I expect sooner than the predictions below).

You’ve got have some sympathy for central bank policy makers. It was never going to be easy to end the massive monetary stimulus that had been introduced to ease the economic impact of the pandemic. Then, just as the world’s major central banks had got investors used to the idea that rates are going to rise – quite quickly in the U.S. and somewhat slower in Europe – the latest exogenous shock comes along to complicate matters. I’m not going to make any guess about how things will unfold in Ukraine, but the effects of events so far are clear to see in asset prices, with global benchmark Brent crude on the cusp of $100 a barrel. Probably worth spelling out two obvious things here: Higher oil prices are inflationary. Central bank policy cannot increase oil supply. The fastest inflation since the 1980s says the Federal Reserve’s gotta hike, but it risks damaging the economy while doing little to move exogenous price pressures. There are already signs that traders are starting to change their minds a little about the outlook for monetary policy. Here are two headlines that crossed my terminal this morning:

Traders Delay Bets on First ECB Rate Hike in 2022 to December
Rates Traders Firm Odds for Fed Cut in 2024 Amid Ukraine Angst

Yes, that second one was about a Fed rate cut. Central banks are definitely going to tighten policy, but they may, due to circumstances beyond their control, be seen by investors to be hiking rates only to cut them later. And that risks the effectiveness of hiking at all.

Please remain safe and healthy.