Investors expressed optimism with their trading following yesterday’s inflation report, sending stocks higher and yields lower by double digit basis points across most of the curve. It was really the core CPI component that showed the most promise, with the MoM measure at 0.2% and the YoY measure at 3.2%, both below estimates. The headline numbers were in-line with estimates at 0.4% and 2.9% for MoM and YoY respectively. Egg prices, oil prices continue to be volatile components while economists express some optimism over rents and alternative rent measures seem to indicate rents are no longer rising. All that said, I don’t think it’s lost on anybody that these numbers are still above the Fed’s target and there is a big uncertainty around the impact of Trump policies and more specifically tariffs.
Bank earnings looked pretty solid across the board with some big beats on top line and earnings. Reports of Israel and Hamas reaching a cease fire also seem optimistic.
The S&P traded up to 5,950, the 2Y yield fell back to 4.30% and the 10Y yield moved down to 4.66%.
On the day ahead it’s Retail Sales and Jobless claims as the highlight in data, but the Bessent hearing might be the real highlight.
The last couple of weeks have brought the concept of “Term Premium” back on the radar. I was on this topic back in October and generally throughout 2024. Remember me talking about trading steepeners? As a reminder, Term Premium is the additional yield that investors require to move out on the yield curve, it’s the compensation for taking on additional interest rate risk. Conceptually, Term Premium, is a departure from a “pure expectations” theory of the yield curve, a theory that posits that yields on longer-dated maturity bonds are simply the average of the expected path of short term rates. Term Premium would add to that expected path of short term rates and compensate the investor for uncertainty and other factors. Most of the talking of late is about how higher government debt levels can and do put upward pressure on longer-dated yields due to increased supply and investors require extra compensation to absorb that supply, but of course there are other theories around term premium. A school of thought might say that when the term premium is high-enough it entices investors to move into bonds and perhaps not search for return through other investments. Of course that rest on a premise that bonds are a substitute for stocks
While the Treasury curve has steepened and shows signs of increasing term premium, it’s kind of crazy that the SOFR swap curve remains super flat. Negative swap spreads are a post for another day or another career era.
In completely unrelated news, Matt Levine wrote about a CFPB (Consumer Financial Protection Bureau) lawsuit against CapitalOne, which you can read about at a million places, just Google it. Anyway, I only write about it because I vividly remember calling CapitalOne after noticing they hadn't adjusted the rate on the 360 Savings account while simultaneously launching a new account at the higher market interest rate. I remember calling and asking why they couldn't just adjust the rate on my existing account, only to be told I would have to open a new account to get the new rate. Anyway it will be interesting to see how this ultimately shakes out.
XTOD: It’s funny to me that people who had money in the Madoff Ponzi scheme and the FTX fraud had better recovery rates (a -6% loss & an +18 to 43% profit respectively!) than any SPAC investor from 2021, most down by -90 to 100%. Literal frauds were a better investments than SPACs!
XTOD: Stocks were down on news of a stronger economy Now they are up on news things might be cooling off Investing is easy
XTOD: If you are buying fintech “growth” stories, but have to worry about credit losses in a recession ($AFRM, $CVNA, etc.) or catastrophic insurance losses ($LMND), then you aren’t really buying a “growth” stock. You are buying a very pro-cyclical derivative.
XTOD: OUTLOOK-AT-RISK | JAN 2025 Downside risks to real GDP growth remain at historically normal levels, with the estimated conditional distribution of average growth over the next four quarters close to the unconditional distribution. Charts | Data https://nyfed.org/41kwlUL
XTOD: Everything from a job offer to a marriage proposal is a yes to one thing and a no to hundreds of thousands of other opportunities. It’s easy—the universal default—to get pulled into the quicksand of half-hearted yesses and promiscuous overcommitment, ending up stressed and reactive, wondering where your time has gone.
https://x.com/ecommerceshares/status/1879112543274447055
https://x.com/awealthofcs/status/1879528060401397982
https://x.com/RealJimChanos/status/1879196701539618817
https://x.com/NYFedResearch/status/1879553035321426026
https://x.com/tferriss/status/1879205414480355587
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