If The Shoe FITZ | R.J. O’Brien

Diary: Week 32- Will We Zig Or Will We Zag meets Bull In A China Shop?

Written by Tom Fitzpatrick | May 21, 2024

The finish last week was a little disappointing in Fixed income in that the potential weekly reversals on 2's , 5's and 10's (US) yields did not take place in that they would have signaled the potential for more immediate drops in yield across the board.

That is not to say yields will not drop further but once again we continue to move in a Zig-Zag pattern.
 
Last week saw some notable data softness in Top Tier data such as CPI (Marginally), Retail sales (aggressively and with downside revisions), Housing-NAHB (aggressively back down into contraction) and Building permits/Housing starts (aggressively), Jobless claims -Initial and Continuing (marginally).
 
As a consequence the Citi economic Surprise index dropped to a new low of minus 23.2 in what can only be described as a 5-week meltdown since the week of 15 April. This looks similar to what we saw starting the week of 25 April 2022 and this continued for a further 4 weeks into June of that year.
 
Let us not forget that this is not an absolute fall in data but rather data printing at worse levels than expected.
 
Eventually when forecasters get fed up continually missing on the downside they will revise down their forecasts which at some point will likely yield topside misses- that is why this is a mean reverting index.
 
Prior to that happening, though, the index still looks like it could revisit the June 2022 low at minus 78 at a minimum.


In addition, as can be seen below, the index (which is ultimately mean-reverting ) can often hit levels of +80 or above or minus 80 or below, before that happens.


At the margin, however, I still think that the type of Data that is missing is continuing to support the view that the Consumer is becoming tapped out and with elevated prices of necessities (Car/House Insurance, Medical, Education, Shelter etc.) there is a real danger that the propensity for discretionary spending collapses.
 
Trust me, If that happens, then the "inflation is never going back to 2% narrative" will end up on the same historic scarp heap as the "inflation is transitory" did.
 
At that point (not yet) Equities may well start to take a different view of this yield moderation ( A la 2000) as any lingering input price pressures for business can no longer be passed on. Last week the new all time high on the DJIA was not supported by similar prive action in the DJ Transports index (Dow Theory) suggesting that there could be reason for caution here.
 
It is also worth noting in that regard that the only "sticky" places left now in Non-farm payrolls seem to be education & Health services and Trade, Transportation and utilities (147k of the 175k total).
 
The previously sticky "Leisure and Hospitality (Discretionary) component has all but vanished creating just 5k jobs in the last number.- That was also the number 1 "cutback" area in the Consumer Confidence readings (Eating away from home) with 8 out of the top ten places consumers were looking to pull back falling into the "discretionary" bucket.


 
But all of this is beating the same drum as last week.....so on to something different.
 
Precious metals are "on a tear again" with Silver just exploding though major resistance levels on Friday and closing the day up nearly 6.5% and doing a very fine impression of a meme stock.
 
Precious metals do well in times of elevated geopolitical shocks- Not really what we saw last week.
 
They can also do well if the USD falls sharply. The $ has been soft but hardly of a magnitude that explains the Gold (5% in last 2 weeks) and Silver (over 12% higher in last 2 weeks) moves.
 
Falling yields tend to help also - The 5-year yield has only fallen (net) 5 bp's in the last 2-weeks.
 
Inflation concerns then? Again hard to argue that the market has been "throwing the baby out with the bathwater" in that respect recently.
 
The speed of this breakout brings back memories of 2010 and 2020 and while the initial target (inverted head and shoulders) suggests a move to $34.50-$35.00 it is not inconceivable that we could be seeing a breakout that takes us back to the major highs of 1980 and 2011 close to $50.



The Gold/Silver ratio collapsed nearly 11% this month so far, as Silver leads the charge here.
 
With Copper having met and exceeded its $501 target on a weekly close last week, even higher levels look likely but Silver is the one firmly in the spotlight now.
 
Why are we getting this silver move now? I honestly have no idea BUT technically this has been building like a pressure cooker. Often Silver benefits from the "law of small numbers" and moves higher at a greater percentage than Gold once Gold gets moving. Maybe that is what is happening here.
 
While Silver is moving more, Gold may be the ultimate catalyst.
 
Is it a coincidence that this happened at the same time as China has launched an unprecedented support program for its ailing property market?
 
Are we now seeing the "last heavyweight holdout" on outright "paper monetary debasement" crumble?
 
The China 2-year yield is now standing at an astounding 1.81% a level, in years gone by, seen only in March 2020.
 
This also seems to be the message being seen by the Chinese stock market with the HSCEI Index up over 40% following the impressive technical reversal in January this year and the CSI 300 Real estate index jumping over 9% on the recent announcement.
 
When you see a major move in a major financial market and do not know why, an often go to response (as good as any) is CHINA
 
This Silver break appears to have legs and I would not be surprised to see a new all-time high on Gold early next week.


 
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