Taps

The contortions in the market so early into a New Year could well be the foreshadow of some proper action. Look no further than what happened in the bond market last week which across the curve saw some truly eyepopping moves. The close on Friday saw the 30-year bond cap its worst calendar week, in total return terms, in almost 50 years. A near 10% loss. In five days. The 10-year note saw the worst week in over 40 years. Only a run in February 1980 saw a bigger loss. It appears that for much of last year there was an indifferent air to the talk on all things taper, a collective shrug. The Fed would always be there. Last week, the stale air took a hawkish chill and there is now, perhaps, a realisation the biggest buyer in the marker, one that has long distorted the traditional means of price discovery, is packing up. The era of abundant liquidity is over. The taps are being turned off. Goldman Sachs are now calling for four rate hikes this year and a taper to kick in around July. Yes, some parts of the equity complex have started to move, the rotation in certain sectors has been violent with some stocks exposed to a monetary policy regime change already a long way off all-time highs; but on a headline reading the S&P 500 is not far off the top, propped up by some hot-to-trot mega-cap stocks. Where the bond market goes, equities often follow and so, if the stiff collars on the bond floor are starting to sweat the prospect of the printing press going quiet, the wider equity market may yet catch one full in the chops. There is also an added dimension to the strut and posture of the Fed this year, meaning this time the talk on pulling the rug out could well be real. The Democrats are staring down the barrel of the mid-terms and the odds of a sweep of the House and Senate is on the cards. High single digit inflation does that to an electorate. And an isolated White House facing ripping inflation and a slowing economy would likely pave the way for further change at the 2024 Presidential free-for-all. And we all know who’s waiting. Double gulp.