QQQM - Weekly Commentary: Instability

2024-05-04 05:00:00 ET

Summary

• The Japanese currency had weakened back to 157.94 by Wednesday, before a second round of intervention pushed the dollar/yen down to 153.
• The Nasdaq 100 traded up to 17,800 in Monday trading - then dropped 2.9% to Wednesday morning lows.
• Any pushback to fledgling tightening these days ensures excessively loose financial conditions.

The Japanese yen (dollar/yen) traded Monday to 160.17, the first time above 160 since April 1990. The yen rallied to 154.54 after purported intervention. The Japanese currency had weakened back to 157.94 by Wednesday, before a second round of intervention pushed the dollar/yen down to 153. It was back above 156 on Thursday, before reversing lower to end the week at 153.05. From high to low, it was a range of 5%.

The Nasdaq 100 (NDX) traded up to 17,800 in Monday trading - then dropped 2.9% to Wednesday morning lows. The index spiked 2% on dovish Powell, only to sink 2% into Wednesday's close. And from Thursday lows (17,291), the NDX rallied 3.7% to 17,927 - and closed the week at 17,891.

Two-year Treasury yields traded to a high of 5.04% on Tuesday afternoon. The intraday low of 4.71% occurred immediately upon Friday morning's release of weaker-than-expected payrolls data (2-yr yields down 18bps for the week to 4.82%). Ten-year Treasury yields traded in a range of 4.69% to 4.45% - ending the week down 16 bps to 4.51%. MBS yields traded in a 34 bps range (6.23% - 5.89%) - closing the week down 22 bps to 5.93%.

At Tuesday's close, the market was pricing a 5.05% Fed funds rate for the December 18th meeting (28 bps of rate reduction). By Friday's close, this rate was down to 4.87% (46bps of reduction). Basically, the market shifted from one cut in December to two starting by November.

Powell is a dove. That was likely settled for good Wednesday. There was justification for market expectations of a more hawkish FOMC and Chair. Inflation has been sticky, and the current trajectory unclear. It's a leap of faith today to believe inflation is moving to the Fed's 2% target.

Powell should not have surprised us. He may play dumb when financial conditions loosen, but his November 1st press conference made it clear that he is astutely aware when conditions are tightening. It would have been out of character for Powell to pivot hawkish Wednesday, not with global yields rising, the yen in trouble, currencies unstable, and stock Bubbles wobbly.

Any pushback to fledgling tightening these days ensures excessively loose financial conditions. The Goldman Sachs short index surged 8.6% this week. The yen jumped 3.5%. Two-year Treasury yields dropped 18 bps, and MBS yields sank 22 bps. A mini "everything squeeze" certainly helps loosen things up. Investment-grade spreads to Treasuries declined one this week to 86 bps, the narrowest spread since November 2021.

Difficult to see inflation cooperating so long as financial conditions remain this loose. Loose reinforces tight labor. And I worry that loose conditions will continue to fuel bubbles (i.e., stocks, tech, AI) until a disorderly tightening has things all crashing down. Stocks appear incapable of an orderly correction, as is expected from a speculative Bubble....

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