Tuesday, Apr 4, 2023

Inflation hedges, UK crypto and more...

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MARKETS

Inflation? Don’t care.

The market reaction to the surprise OPEC+ oil production cut highlights how the economic paradigm is changing, with inflation becoming less of a concern than economic growth. Indeed, longer-term inflation expectations, as measured by the US 5-year and 10-year breakevens, dropped yesterday.

(chart via TradingView)

Yields rose slightly on news of the OPEC+ oil production cuts – but not by much. The US 10-year yield, for instance, merely recovered what it had lost over the weekend. A much sharper move, this time downwards, came with the release of the US PMI data which further confirmed an economic slowdown (more on this below).

(chart via TradingView)

This is quite extraordinary. A strong inflationary impulse? Not important. Signs a recession will force interest rate cuts? Awesome, more liquidity incoming! This goes against Fed messaging, creating an uncomfortable dilemma: lower yields boosts asset prices which sends a signal to consumers that things are fine and you can keep spending. This is not what the Fed wants.