Today is the last day of trading for the first quarter. Wall Street and the Federal Reserve again vastly missed their forecasts for the period. Writing the obvious, perhaps forecasting models are flawed or the world is changing dramatically.
The world has dramatically changed. Supply chains and methods of production have been altered. The West has weaponized the flow of funds while the East has weaponized the production of goods. The misguided notion that trade and economics may prevent wars was once again proved as misguided.
The on shoring of productive capacity has caught many by surprise where price is no longer the determinate of a purchasing decision. Reliability has replaced efficiency. Interest rates are significantly higher and the odds of returning to yesterday’s levels are extremely low.
And then there are sovereign debt levels. Many have suggested the global economies are walking into a massive buzz saw and a sovereign debt crisis centered in the industrialized economies is all but unavoidable.
Some are comforted by the notion, however, that most crises are the result of unexpected events; no one saw it coming therefore a shock as most are unprepared.
As measured by the VIX, complacency is still great albeit this “fear gauge” is nominally off its lows, thus suggesting the markets may be prone to increased or outsized volatility if the unexpected occurs.
Market activity is expected to wane during the day ahead of the three-day Easter weekend. The bond market closes today at 2:00 and is closed tomorrow as are the equity markets. Tomorrow is the release of the monthly PCE data, or the primary inflation indicator of the Federal Reserve.
Futures and derivative markets are open, but trading staffs are expected to be thinned thus suggesting if the data differs from expectations, an outsized response may unfold.
I vividly recall Good Friday 1994 when the unemployment data surprised on the upside. Most markets were closed and the thirty-year Treasury got crushed, falling over 7 points. Monday’s opening was beyond ugly.
Hopefully history does not repeat itself. The Federal Reserve has dogmatically stated monetary policy will be data dependent, a major reason for the intense bond market volatility.
Today several economic indicators are released including revised 4Q GDP, pending home sales and a sentiment survey.
Commenting on yesterday’s market activity, equites advanced moderately on a late day rally, perhaps on quarter end institutional rebalancing. Bond yields fell across the curve.
Last night the foreign markets were up. London was up 0.31%, Paris up 0.53% and Frankfurt up 0.10%. China was up 0.59%, Japan down 1.46% and Hang Seng up 0.91%.
Futures are flat even as the two-year Treasury or the instrument most sensitive to monetary policy is up a5 bps in yield based on Fed Governor Christopher Waller reiterating the well-known Fed mantra that the Central Bank “needs to see lower inflation before easing monetary policy.” The 10-year is off 7/32 to yield 4.22%.
