Whiplash Wednesday

Inflation day is finally here!!

Tickets are SOLD OUT for this BOX OFFICE event and it's been hyped so much that disappointment is almost inevitable... 👇

Day to day, it's hard to read the mind of the markets...

Is it a rotation or a selloff?

Is it REALLY all about inflation?

Yesterdays sector breakdown hinted at a broader selloff, but tech & materials were the best relative performers 👇

Danske: The inflation scare continued in markets, this time most felt in Europe with markets down 2-3%.

US equities managed to recover during the session as investors bought the dip in growth.

So, the rotation reversed again with value under pressure.

As a result Dow ended -1.4% lower while Nasdaq almost surfed at -0.1%. S&P closed down -0.9% and Russell 2000 -0.3%.

Sector wise, energy, industrials and financials were the worst performers while materials, tech and communication services were the relative outperformers.

US futures are pointing to another red day this morning though, driven by tech (futures down around 1% for Nasdaq and S&P 500 so no sharp sell-off).

Rotation reversals and re-reversals...

Zoom out for the month so far and it's a different picture altogether...

An army of Fed speakers yesterday preached patience...

Bullard: “It’s too early to talk taper here,”

“Even though you can sort of see the end of the tunnel. We’re not there yet. We’ve got to push hard to get all the way to the end.”

Harker: “While the economic situation is improving, recovery is still a work in progress, and there’s no reason to withdraw support yet,”

Brainard (via Newsquawk): said the outlook is bright but Fed is far from its goals and that inflation is tough to predict and could be transitory, while they will remain attentive to risk that inflationary pressures could prove persistent.

Brainard also said she will be looking for employment to be closer to assessment of full employment and for inflation to be sustainably closer to 2%, while she expects to make progress on both employment and inflation fronts.

Brainard added that market surveys suggest the Fed's reaction function has been communicated quite well and that the Fed is aiming for broad-based and inclusive maximum employment, as well as eliminating shortfalls.

Furthermore, she stated that labour demand and supply are recovering at different paces and that there are frictions although she anticipates a surge in hiring this summer and stated that asset prices are elevated, but cannot hold back support just because the stock market is rising. (Newswires)

(via Bloomberg): “A limited period of pandemic-related price increases is unlikely to durably change inflation dynamics.”

I don't buy the idea that the Fed is trapped, or that the market truly believes inflation will run away and force the Fed to act.

Perhaps I'm wrong, but there's a definite aroma of BS in the air, and I would not be surprised in the slightest to see a 'buy everything' rally today...

Some variant of this headline on the close...

MARKETS RALLY DESPITE INFLATION FEARS

Theres a lot of uncertainty to digest however so I'd wager that two way volatility is more likely to persist for now until a new consensus emerges...

Volatility is likely to pick up around the release, and Clarida speaking 30 minutes later could be a decent insurance policy if it's a scary big number...

Commodities positioning is stretched long, especially in grains...

The WASDE report will be released later today.

I'm not going to pretend I understand much/anything about grain markets, and food prices are stripped out of the core inflation measures that central banks base policy decisions on.

However, I've seen mentions of expected high volatility around the release ('global supply crunch/fears' meet stretched positioning) and it's something else to keep half an eye on for the overall inflation narrative...

The 10 Year auction at 18:00BST will be monitored for demand at current yields, and could be especially interesting if the inflation figure comes in hot...