RBC: "Clients Increasingly Uncomfortable" With The Fed "Tightening Into A Slowdown"

Tyler Durden's picture

First thing this morning, one of the recent "bullish converts", Bloomberg Marc Breslow was the first to accuse Yellen of making a big mistake, and warning that this may be it for stocks for the time being. He was followed by "Macro Tourist" Kevin Muir, who likewise had been "bullish for a while" then turned negative today on concerns that the global liquidity tsunami is ending. Now, RBC's cross asset wizard, Charlie McElligott (recently caught in a friendly feud with his magical JPM peer, Marco Kolanovic), has released a note explaining that today's selloff may be just the beginning as traders realize that what Yellen has done, especially with China's credit impulse collapsing, is "tightening into slowing", aka the single biggest policy error the Fed could do.

His full note below.

'TIGHTENING INTO SLOWING' VIEW GAINS FURTHER STEAM

SUMMARY:

  • ‘Sloppy’ risk-assets this morning not just a ‘Trump obstruction’ story
  • Collapsing inflation expectations / breakevens are driving ‘real yield’ TIGHTENING
  • In addition to the Fed hike, we see BoC and BoE too further inflect towards TIGHTENING
  • As such, the “tightening into slowing” narrative gains further market traction
  • Two-sessions yesterday:
    • 1) ‘Post CPI’: rates & breakevens collapse drives $ back into the status-quo, ‘Slow-Flation’ narrative trades
    • 2) ‘Yellen Q&A’: signs of de-risking / profit-taking / grossing-down on mounting belief of potential ‘Policy Error into a Growth Scare’
  • Bigger picture, ‘long game’ Fed hiking and ‘tactical’ markets can both be right on account of ongoing ‘macro range trade’ scenario

COMMENTARY:

Yesterday was a tale of two totally-distinct trading sessions wrapped in one day, and which frankly captured BOTH of the ‘scenarios’ I laid-out in my notes yesterday—essentially, ‘post CPI’ and the ‘Yellen Q&A.’

My ‘scenario 1’ fit the first two-thirds of the trading day bang-on, as post the CPI whiff, nominal rates, breakevens and USD all collapsed, creating the exact impact I expected in factor market-neutral themes: a bid to ‘anti-beta’ and ‘growth’ tilts against downside in ‘value’ and ‘size’ (essentially, back to the YTD leadership / laggards regime long ‘secular growth,’ ‘defensives’ and ‘quality,’ against short ‘cyclical beta’ and ‘small caps’).

Later though, JY did what the market wasn’t prepared for, and as I warned pre-Fed here:

“Turning to the Fed now: the entire investing world now feels completely justified in coming into today with 'dovish hike' expectations.  The issue there is that it sets a VERY fine-line on messaging, where you have such consensual expectation of ‘dovish hike’ that the slightest disappointment in this view could rock us.

 

IF the Fed were to somehow ‘screw-up’ this very simple ‘soft-ball’ messaging task and come off as anything resembling ‘hawkish’--perhaps by again attempting to use the term ‘transitory’ to describe what are ‘outright collapsing’ inflation expectations—the market murmur of ‘Fed policy error’ grows exponentially.

 

And as per this morning’s note, this would be the ‘2nd scenario’ I talked about towards the bottom of the piece--a broader de-risking interpretation largely based upon a view that the Fed has truly painted itself into corner here.

 

If they continue to push 'tightening' under ‘transitory inflation weakness’--when now we are confirmed as SLOWING and GETTING SOFTER--we could get that ‘de-risk’ where folks actually ‘gross-down’…

 

That’s the ‘policy error’ interpretation, and it’s entirely dependent upon today’s Fed guidance.  The market will NEED to hear them state plainly / upgrade the tone of the concern / clearly message that they are ‘watching inflation closely’ to assuage these fears.”

So here is the way I described what happened yesterday to a few folks, in very-much ‘oversimplified’ terms (think of it as ‘rich man’s haiku’):

  1. She came out ‘hawkish’
  2. And looks ‘tone-deaf’ to some (perceived ‘downplaying’ of 3 consecutive Core CPI misses as “transitory”)
  3. And mkt looks at it like potential ‘policy-error’
  4. Which can cause a ‘growth-scare’
  5. Which is occurring with grosses- and nets- near cycle-highs
  6. While BE's are collapsing alongside curves
  7. And oh yeah, oil -4%
  8. So now you're seeing some modest signs of 'gross-down' behavior (or simple ‘profit-taking’) as clients get increasingly uncomfortable with what may lie ahead

Note that this is EXACTLY what I’ve been speaking-to as the ‘growing risk-asset bearish narrative’ over the past few months, and is now coming a big-step closer to fruition: “tightening into disinflation” / “slowing into tightening” et cetera. 

And idiosyncratically over the course of the week, you can ‘add-in’ this: not only did the Fed hike again this week…but we have an absolutely clear inflection by the Bank of Canada, as well as today’s ‘shocker’ BoE vote which edged-up 5-3 (closer to hiking than anticipated). 

Long-story-short, that is why I believe stocks are acting pretty sloppy (Spooz -25 handles from yesterday morning’s highs): real rates are TIGHTENING as breakevens collapse.  Sound familiar?  That’s the “tightening into a slowdown” narrative popping-up again, and is a bad cocktail for risk.

S&P E-MINIS HIT AS ‘REAL YIELDS’ SPIKE CREATES FEARS AROUND ‘TIGHTENING INTO DISINFLATION’ / ‘TIGHTENING INTO SLOWING’ FEARS:

That said, let’s talk bigger-picture on ‘market’ versus ‘Fed’ perception:

The Fed believes they have to tighten long-term monetary policy based upon a ‘still-evident’ utilization of the Philips Curve, as highlighted by Tom Porcelli yesterday while picking-through the commentary (and why Tom continues to be absolutely steadfast in the view that they are absolutely committed to their hiking course, whether the market ‘gets it’ or not!).

The ‘market,’ on other hand, is thinking very tactically, allowing ‘real-time’ market ‘inflation expectations’ proxies to TRADE AROUND this view of policy misalignment against ‘slow-flation’; thus, the recent duration bid / flatteners, the bid to ‘safe yield’ IG credit and equities ‘bond-proxies’ alongside ‘stocks that can grow regardless of the economic cycle’ (tech, biotech, consumer internet) while fading commodities (iron ore and crude especially) and economically-sensitive equities like energy, banks, materials and industrials.

Here’s my point: they can both be ‘right’ because they are operating on different time horizons.  In that sense, the ‘macro range trade’ still exists, trading this 2.00% to 2.40% range where one ‘buy rate sensitives’ at 2.00% as Fed remains resolute to continue hiking (offers you ‘convexity’ to moves higher in yields), while too you can trade ‘short reflation’ at 2.40% on account of this ‘tightening into disinflation’ theme remains intact.

FWIW and in-closing, the risk of course to this range-trade view then becomes a larger ‘risk asset’ selloff / drawdown accelerating to something more meaningful which could then pull us through that 2.00% level break the range.  That said, this continues to be a lower-likelihood outcome in the ‘now’ as we still see those ‘slowing-but-still-expansive’ data in US today (ongoing better Jobless Claims and strong Philly Fed and Empire Manufacturing--especially in the ‘New Orders’ bucket) perpetuating the conditioned ‘buy the dip’ mentality with ‘real money’ equities investors.  

‘TIGHTENING’ WITH U.S. AND CHINESE FINANCIAL CONDITIONS:

THE INCREDIBLE IMPACT OF TIGHTER CHINESE CONDITIONS (HIGHER CHINESE SHORT-TERM RATES--OVERNIGHT SHIBOR, INVERTED) ON GLOBAL COMMODITIES:

FOLLOW THE FLOW, AS THE CONTRACTING CHINESE CREDIT IMPULSE TIGHTENS FINANCIAL CONDITIONS, DRIVING GLOBAL INFLATION AND ECONOMIC SURPRISE INDICES LOWER ALONGSIDE RATES:

U.S. CURVES FLATTENING TO ’07 / ’08 LEVELS:

THE DIRECTION OF NOMINAL YIELDS AND THEIR IMPACT UPON EQUITIES ‘VALUE : GROWTH’ / ‘CYCLICALS : DEFENSIVES’ RATIOS:
 

MORE EVIDENCE OF FUNDAMENTAL MACRO IMPACT ON U.S. EQUITY FACTORS—5Y REAL YIELDS AND S&P ‘VALUE : GROWTH’ RATIO

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saveUSsavers's picture

The daily FREE MONEY pimps want to continue their raping of the real economy

FK-off!

BorisTheBlade's picture

They will have to re-learn meaning of stagflation eventually.

And the Fed will also eventually be behind the curve with raising rates.

Eventually, if only we knew the timing.

BullyBearish's picture

he who panics first, panics best...

IShrugged's picture

Got to Marfa yesterday, where are y'all? See you here! Nice little town, did not see lights last night, sign says on a clear night and it was pretty cloudy. Will try again, they have a nice viewing area about a mile east of town. Tumble in rv park is pretty nice and still has a few spots available.

IShrugged.

The_Juggernaut's picture

What's this "mistake" shit?  Does anyone really think that she doesn't see the obvious effect this will have?  What she's doing is clearly intentional (for better or worse).

spastic_colon's picture

exactly......every "analysis" should just state the obvious; the buyback train is off the rails, the arb is going, going........

auricle's picture

What slowdown? Yellen says everything is awesome. 

TeethVillage88s's picture

Janet "Insider" Yellen?
- Janet "Sweetheart Deal" Yellen?
- Janet "Quid Pro Quo" Yellen?

TeethVillage88s's picture

"Clients Increasingly Uncomfortable" With The Fed "Tightening Into A Slowdown"

- Since it proves the US Treasury, US Congress, and Central Bank haven't fixed the Economy, Jobs, Labor Compensation, high taxes & rent on poor to middle class

aqualech's picture

Pathetic.  Everyone in the stock market now accepts as normal that it is the FED's job to control (keep levitated) the stock market.  Mom-and-pop will be mad as heck if the Central Planning Bureau doesn't protect their artificially-created paper wealth.

Life of Illusion's picture

 

 

"Nominal Terms"  policy continues until currency crisis.....

saveUSsavers's picture

What " TIGHTENING " ?????

Gordon_Gekko's picture

EXACTLY. WTF is 0.25% gonna do? NOTHING that wasn't already gonna happen. The fact that the dollar still has some purchasing power left is the only thing standing between the Fed (comprised of USELESS bureacrats and IDIOTS) and COMPLETE IRRELEVANCE.

saveUSsavers's picture

Don't think these PRIMARY DEALER COCKROACHES can't BANG THE MARKET to control the Fed, a la Paulson's bang for TARP vote.

6-7 Goldman roaches CONTROL TRUMP POLICY

EmmittFitzhume's picture

If the "stock market" enters a correction we will see interest rates cut to negative if need be.  All that matters is the stock market says Alan Greenspan

Squid Viscous's picture

speaking of cocktails, it's noon in Bermuda!

time for a drink!

order66's picture

Really? Buying in ES_F is as strong as ever off 2417. Nothing interesting happens until we close below 2380 on a weekly basis.

Squid Viscous's picture

exactly, a 12 handle bounce in the spooz, because everyone is really quite fearful, really!

CJgipper's picture

point of order - Raising overnight rate by .025% whil buying 100B of stock a month is not "tightening".  They will never again "tighten".  They can't.

mo mule's picture

It's all Bullshit.. The Rothschilds banking system...run under the blanket of the BIS, (Bank of International Settlements) has created all this free money for the US and the rest of the Central Banks around the world and now they want to start earning interest on their money. They need moar money. The Ponzi continues.......It's time to start collecting on the notes.  Pay up people......

It's time to tell the Central Bank and BIS to go fuk themselves. We don't owe them a thing, cancel the the debt an issue real Treasury note's. 

But that won't happen unless we have a real awakening and a Real War against the "House of Rothschilds" and their banking cartel. 

Right now they owe you and most don't have a clue, how or why this is even possible.  But the BIS is going to get their 6% on their free money out of thin that the Fed and PPT are pumping into the USAA banking system.  Pay up or die, MF!

withglee's picture

It's time to tell the Central Bank and BIS to go fuk themselves. We don't owe them a thing, cancel the the debt an issue real Treasury note's.

You write as if you know what money is. Please tell us what you think it is.

Inquiring minds want to know.

vegas's picture

Selloff? What fucking selloff? Oh, that dip down some, where shorts got their ass handed to them yet again by the central banks? On the other hand RBC Muppets just figuring out the economyy is shit and the FED is raising rates? Tell them to think "transitory" and not to worry. Just BTFD you fucking idiots.

 

www.traderzoogold.blogspot.com

withglee's picture

Sound familiar?  That’s the “tightening into a slowdown” narrative popping-up again, and is a bad cocktail for risk."

That's the money changers farming operation. They have conditioned you to call it the "business cycle".

It is harvest time.

withglee's picture

The Fed believes they have to tighten long-term monetary policy based upon a ‘still-evident’ utilization of the Philips Curve, as highlighted by Tom Porcelli yesterday while picking-through the commentary (and why Tom continues to be absolutely steadfast in the view that they are absolutely committed to their hiking course, whether the market ‘gets it’ or not!).

The ‘market,’ on other hand, is thinking very tactically, allowing ‘real-time’ market ‘inflation expectations’ proxies to TRADE AROUND this view of policy misalignment against ‘slow-flation’; thus, the recent duration bid / flatteners, the bid to ‘safe yield’ IG credit and equities ‘bond-proxies’ alongside ‘stocks that can grow regardless of the economic cycle’ (tech, biotech, consumer internet) while fading commodities (iron ore and crude especially) and economically-sensitive equities like energy, banks, materials and industrials.

With a "proper" MOE (Medium of Exchange) process, there is no such thing as monetay policy ... long term or otherwise. There is no Philips Curve ... there are no sooth sayers like yourself.

There are only traders like you and me (the real market) making independent trading promises spanning time and space and getting them certified ... those certificates (ledger entries) being freely created and exchanged money. That money circulates as the most valued object of ever simple barter exchange until the trade either delivers as promised, or defaults and like amount interest collection immediately reclaims and destroys the orphaned money.

No banks ... perpetual zero inflation ... perpetual free supply of money ... perpetual zero interest load on responsbile traders. And money changers and the governments the institute for their own protection dying on the vine because that can't compete with a "proper" MOE process ... they can only duplicate it.

decentralisedscrutinizer's picture

 

Almost all the world’s economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where their dominant military force resides. The US Constitution is therefore the “kingpin” of an all-inclusive global financial empire. These fictitious entities now own the USA and command its military infrastructure by virtue of the Federal Reserve Corporation, regulatory capture, MSM propaganda, and congressional lobbying.

 

The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, for whatever reason, our Founders granted the greediest businessmen among them unrestricted corporate charters with enough potential capital & power to compete with the individual states, smaller sovereign nations, and eventually to buy out the USA itself. The only way The People can regain our sovereignty as a constitutional republic now is to severely curtail the privileges of any corporation doing business here. To remain sovereign we have to stop granting corporate charters to just any “suit” that comes along without fulfilling a defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't afford to privatize our Treasury to transnational banks anymore. Government must be held responsible only to the electorate, not fictitious entities; and banks must be held responsible to the government if we are ever to restore sanity, much less prosperity, to the world.

 

It was a loophole in our Constitution that allowed corporate charters to be so easily obtained that a swamp of corruption inevitably flooded our entire economic system. It is a swamp that can't be drained at this point because the Constitution doesn’t provide a drain. This 28th amendment is intended to install that drain so Congress can pull the plug ASAP. As a matter of political practicality we must rely on the Article 5 option to do this, for which the electorate will need overwhelming consensus beforehand. Seriously; an Article 5 Constitutional Convention is rapidly becoming our only sensible option.

 

This is what I think it will take to save the world; and nobody gets hurt: 28th Amendment

 

28th Amendment:

 

Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to:

 

1, prohibitions against any corporation; a, owning another corporation; b, becoming economically indispensable or monopolistic; or c, otherwise distorting the general economy;

 

2, prohibitions against any form of interference in the affairs of; a, government, b, education, c, news media; or d, healthcare, and

 

3, provisions for; a, the auditing of standardized, current, and transparent account books; b, the establishment of state and municipal banking; and c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.