I'm constructive on bonds. I think the 10-year yield should find strong support at 4% and should drift toward 3.7%, which should play out across the curve.
I'm comfortable with credit here, though I prefer munis and investment grade over high-yield and leveraged loans. There are more and more interesting ways to trade the collateralized loan obligation market and I will do a deeper dive into that in the near future
Commodities, I'm neutral at best.
Stocks, overall, I like and think the leadership of last year's worst-performing stocks/sectors will return after a nice pullback over the past two weeks.
Why am I constructive?
The data have turned, and I'm adjusting with it.
I think that Citi Economic Surprise index is very relevant at the moment. I was bearish on the economy and was looking for disinflation. Towards the end of last year and the first part of this year, that was playing out, and then something snapped and the data started outperforming.
Part of the outperformance was that expectations were lowered, but a big part has been outright solid data.
My current view is that, as I discussed last Friday, markets are moving into the acceptance stage on Fed hikes (using the Five Stages of Greif framework). Even if the data come in a bit hot, hiking expectations won't skyrocket. Any print that signals inflation returning will not be well-received, but won't be punished, either. (Friday morning, futures closed above their 8:35 am post-number levels and well above the 10 am cash market open lows).
That said:
- There are still a lot of questions about the economy. Is the consumer getting tapped out? Credit card debt is rising back above pre-Covid trends, and delinquencies are also rising, in autos, too. Inventories remain a problem. Are we due for some weak economic data that will support the market here? I think yes, as some of the data has been weirdly good, which often reverts, and economists have started to ratchet up expectations.
- Services will be key to watch. Services saved the economy in January, but I continue to believe that the pent-up demand has peaked and we will see slowing.
- Of all the data, jobs have been the strongest (if you ignore ADP, household, take into account annual revisions that get buried, etc), so there is a real risk (hope for bulls) that Friday's job data will be weak (or more likely, have some serious negative revisions).
The one thing that seems a wild card is Russia:
- There is a chance, albeit small, that China's 12-point plan leads Russia and Ukraine to the negotiating table.. Some sort of truce seems best, but also unlikely as Putin doesn't seem in position to give up ground and Ukraine, with the West's backing, seems focused on regaining ground lost years ago.
- I think there is a chance, after a few weeks, if nothing happens on the peace front, for China to proceed with a sale of arms to Russia. This would end all pretense of where they stand relative to the U.S. (I think we need them more than they need us, at least until we develop our own more secure supply chains) and this would highlight that. It would be bad for markets.
- The most likely outcome is an ongoing war of attrition in Ukraine, but keep an eye on those other two possibilities.
I've added to risk and will keep that risk into this week. I'm heading to San Diego for some interesting geopolitical and macro discussions this week
