Bullish on Treasuries and Equities

While the long-term trend in Treasuries appears to have shifted down, and the prospect of rising rates could be troublesome for the equity markets this year, we see both Treasuries and equities rising in sync in the weeks ahead. We base this view on the fact that initial claims have stagnated for five weeks, there have been two disappointing monthly US nonfarm payroll reports, surging oil prices are robbing the consumer of disposable income, and nearly five million US infections seen over the past week. Usually, evidence of slowing in the economy is a negative for equities, but recently the markets have been fearful of rising interest rates, and soft scheduled data along with high infection rates should discourage or handcuff the Fed.

With the leveling out of PPI readings and the recent soft data, the probability of a March interest rate hike is declining. Therefore, we see the equity markets settling into a pattern where soft economic data is viewed as good for equity prices, while good economic data is bad. On the other hand, in the eyes of many market participants, the Fed is behind the curve on controlling inflation and a period of soft data and leveling inflation could be short-lived. Therefore, we expect bonds and stocks to return to a positive, correlated pattern like what was seen in late September, October, and November.

Nearby d&p 500 emini vs nearby us bonds

It should be noted that the spec and fund net long in the E-mini S&P 500 remains modest for a market that is close to all-time highs. The Treasury Bond market recently saw its spec and fund net short the largest since October. Furthermore, Treasury Bond prices have seen a quick, 25-day, 10-point slide, while the S&P saw an even more compacted four-day correction of 228 points! Both bonds and stocks appear to be in a technical position to rally.

weekly initial jobless lciams

Originally Published on January 14, 2022

Charts Sources: Bloomberg and US Dept of Labor

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