If everyone thinks there will be tightening, there will be no tightening

I read today's Bank of America's Flow Show report...

And was quite staggered at something.

Firstly, I am unsure as to why Michael Harnett deems inflation to be permanent based on those numbers (I mean, no mention of base effects, which although a meme now, still have a hell of a lot of merit when discussing the topic).

Secondly, markets are forward looking...

If the thesis here is that a market crash will lead to central banks not tightening, then I think it's possibly more prudent to say that the expectations from the market that central banks will tighten will lead to a crash...

Before they actually tighten.

Take this chart as an example of what happens to the dollar before and after a rate hike.

The market prices in the hike before the Fed actually act.

When rates are indeed higher, the dollar sells off, when you'd probably expect the opposite to occur in theory since relative rates come into question..

Now have a think of where we are now whilst bearing the following chart from JPMorgan in mind...

An overnight index swap (OIS) can be used to speculate on future rate moves by a central bank or to hedge out interest rate risk, so is a good barometer for forward expectations of where rates will go.

And the chart above shows how wrong the market has consistently been on predicting rate rises.

So back to current context...

BofA reckon inflation is going to be more permanent than what the Fed believes...

But there are some indicators flashing that tend to agree with the Fed.

I meme'd this earlier...

Because take a look at these charts of lumber and then used cars (which was the largest inflationary driver in the last print)...

And finally, we can look at the consumer desire to purchase a home.

It seems as if consumers have found their biting point on the home buying front.

And this could possibly tie in with inflation expectations seemingly being near a top.

Let's firstly check out 10-year breakeven inflation expectations and then a broader look at inflation.

The market is perceiving the inflation rate over the next 10 years to be sitting at ~2.3%.

This is not exactly the rabid, regime changing inflation number that you would expect really, is it?

And now we can look at inflation over the longer term.

We're pretty much at the upper boundary of the post early-80s ridiculous spike.

Has anything changed to drive this higher in terms of longer term fundamentals, especially when we are to consider base effect from the largest drop in inflation since the early 20th century?

It's a resounding NO.

As I explained in this article from last week, we are dilly dallying in the short term and there seems to be little to no focus of the mid to long term picture.

I don't care - I am a bond bull over the longer term.

People may think it's a ridiculous notion, but I am looking at there being a relatively large disappointment for the inflation guys and girls, even if the inflation metric is bullshit nonsense, conjured up by a shady cabal insistent on pumping everything up.

Interlude: Trade update: short EURGBP with entries at 48, 70, 88 and 02

I'm looking at the broader picture here both from a chart basis and also my views on rate differentials.

I'm still in this with minimal risk because I want to allow some breathing room before adding bigger.

Quant Insight indicates that the 5s30s differentials between the Eurozone and the UK are a key negative short term driver for the pair...

So let's take a look.

I've created a spread of... errr... a spread here to show the UK's 5s30s spread over the German 5s30s (white).

In cyan (I have learnt to differentiate colour tones because of the girlfriend), we have EURGBP.

What we are looking for is this spread to continue pushing to the upside.

We are looking for UK gilts to have a steepening curve versus German bonds in essence - this implies more hawkishness and so there is a preference for sterling!

That's essentially the trade if anyone was looking for the macro.