Steno's Signals: A New Month, a New Macro Regime

TL;DR

February saw a decline in liquidity, an increase in inflation, and a rebound in growth, which had lukewarm returns in most asset classes. Vigilance is needed for assessing the macro momentum in these three variables.

Transcript

if we look at February in hindsight now I think it's safe to say that liquidity veined inflation resurfaced and growth also rebounded so we had inflation up growth up and liquidity down that is not necessarily a particularly good cocktail for risk assets equities and bonds overall and the month of February had relatively lukewarm returns in most as... Read More

Key Insights

• 😮 February saw a major change in the macro regime compared to January, with declining liquidity, rising inflation, and rebounding growth.
• 🏯 Japan's bond buying spree contributes significantly to global liquidity, while Japanese accounts are selling bonds in the US and Europe.
• 🈂️ Inflation is spreading from the US to Europe and Japan, with wage-driven service inflation on the rise.
• 🌍 Real wage growth reversal in Europe and the US suggests a potential rebound in growth.

Questions & Answers

Q: What were the factors contributing to the decline in liquidity in February?

The decline in liquidity was mainly driven by the US dollar gaining momentum and a lack of liquidity from the US Treasury. The anticipated boost to Dollar liquidity from the US Treasury did not materialize, leading to a decline of over $900 billion in liquidity.

Q: Why is Japan's bond buying spree important for global liquidity?

Japan's Central Bank has been buying bonds at a record pace, contributing significantly to global liquidity. As the Bank of Japan increases the amount of Japanese yen in circulation, it creates a ripple effect in the global financial system. The increased liquidity will eventually flow into other markets as Japanese counterparts invest the fresh yen.

Q: Why are Japanese accounts selling bonds in the US and Europe?

Japanese accounts have started selling bonds in the US and Europe because yield levels in Japan have become more attractive on a relative basis. When accounting for the running cost of hedging FX risk, Japanese investors find it favorable to invest in Japanese bonds rather than US treasuries or European bonds. This trend may reverse if there is a steepening of the dollar curve or the Euro curve relative to the Japanese curve.

Q: How is inflation spreading from the US to other countries?

Inflation numbers in Europe have shown a rise in wage-driven service inflation, reaching almost 1% month over month. This would lead to annualized inflation above 10% if the price increases continue. Historically, there has been a lag between service inflation in the US and Europe, suggesting that the inflationary pressure may spread slowly but surely to other countries.

Summary & Key Takeaways

• February experienced a decline in liquidity, primarily due to the US dollar gaining momentum and a lack of liquidity from the US Treasury.

• Japan has become a major contributor to global liquidity with its record pace of bond buying, while Japanese accounts have started selling bonds in the US and Europe due to more attractive yield levels.

• Inflation is spreading from the US to other countries, particularly in Europe and Japan, with service inflation on the rise.

• Wage Trends and real wage growth in Europe and the US suggest a rebound in growth, which could be positive for equities.