Bond market is not buying Central Banks' “Fake it till you make it” strategy

Mathan Somasundaram

Deep Data Analytics

Local market repeated the same cycle as yesterday by starting positive for an hour and then fading through the day but managed to deliver a late recovery to finish flat. Retail and Health Care were the outperformers that held it together. 

The market sentiment was all over the place. Bond market has started to consolidate after US inflation data while Central Banks are sticking to their fake/core inflation that allows them to keep rates lower forever. The real inflation moved from 1.4% to 1.7% while the core inflation was subdued. Central Banks have removed all connections to reality over the decades by removing property prices, commodity prices, food prices and energy prices out of the core inflation. I am pretty certain most of the population wishes they can do the same by removing all of those costs from their budget but they can’t. Similarly, most corporates are going to be reporting higher costs in 2021 as inflation is real. Central Banks may be able to stick to fake inflation to justify the fake rates but economy does not function on alternative facts. Economy is real and costs are real. Central Banks use fake inflation to keep fake rates lower for longer to keep economic cycles at bay and maintain asset bubbles longer. Everything comes at a cost. The longer the fake cycles are being played out, the bigger the economic mess being created into the future and longer the returns are being stolen from savers/retirees. The bond market is not buying the fake inflation and fake rates anymore. US 10 year bond yield is consolidating in a trading range where historical trend suggest a cycle above 2% is likely in the next few months. Given that we are cycling weak periods, inflation is likely to beat 3-4% in the next few months and bond yields are likely to chase that and move above 2%. What is the Central Bank threshold that breaks the alternative fact bubble and force them to act? Bond market is going to find out!!!

Comments on US market last close

US market higher on opening up with RUSSELL and DOW leading while NASDAQ was flat. Inflation data was recovering as expected and that will raise cost for households and corporates while core inflation was timid. If you remove asset price and commodity inflation out, things are going to be timid when you have high unemployment. Not that central banks were going to move on rates anyway. The inflation data remains in trend to push bond yields above 2% in the next few months. Treasury issuance was not a total disaster as it could have been. Bonds and USD ticked lower while commodities ticked higher. Gold is starting to move with inflation. Tech was the only red sector while Energy and Banks were the best. Stimulus just needs president's tick while infrastructure chat has started. Reddit groups were back at popping and collapsing stocks.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!

Full SUNSET STRIP report with end of day market stats are on the attached link.

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Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 25 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

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