Send It in Jerome!

 

It seems all the Hawks came out on Wednesday. First, the hawkish comments out of Chairman Powell’s speech then it was the NBA’s Hawks that stunned the Sixers that night with a 26 point comeback on their way to a series win. The Fed said it was beginning to think about raising rates as inflation might be a bigger problem than initially expected, almost no asset was spared. Equities sold off a bit, some sectors worse than others. As mentioned, the bond market reacted with the Fed. The front end sold off and the ultra caught quite a bit, so as we’ll see in the IFR piece we have a quick flattening of the curve. Five year break-evens also fell on the day. That implies that the Fed's measures are likely to curtail inflation. Commodities were hammered across the board, but Metals really got beat up. The only true beneficiary on the day was the US Dollar. It rose 1.84%, which is a gigantic move for the global reserve currency. Speaking of currency, Crypto was not immune to this either. Bitcoin sank 4.5% on the day. Jerome Powell and friends seem to have broken the long inflation trade like Jerome Lane famously broke this backboard. How long till a new backboard comes out and the high flying offensive starts again?

My colleague put together some IFR content summarizing the bond market’s reaction to the Fed this week. The biggest eye opener for me was the fact that we took out 6 months of steepening in less than a month. I guess it’s the proverbial escalator up and elevator down. I heard Peter Brandt, look him up if you don’t know his story, say it’s more like jumping out the window down for some of these trades.
US GOVTS WRAP - Yield curve chaos causes carnage, 5s/30s 25bp 2-day furious flattening - IFR News

This week’s focus will likely continue to be on how the reflation trade reacts. Big tech is also in the spotlight with the House voting on a bunch of antitrust bills. The big focus for me is tracking the Russell Recon on Friday. More on that below.

Earnings Watch

Last Week

While we’re working with a limited release schedule and many were focused on fixed income, currencies, and commodities, there were some fireworks in equities earnings. Smith & Wesson ended the week with a twelve gauge bang. A huge surprise on earnings beating handily on both the top and bottom line. The opened strong Friday then took off ended the day up 17% and traded more than 10x its average volume.

This Week

Nike is the biggest name reporting next week, but there are a few others to keep an eye on. I’m looking forward to hearing from FedEx, Darden, KB Home, and Winnebago. I think these should give us some more sense on the re-opening. Darden’s estimates have been on the move higher over the last week.

Equity Capital Markets

Most of the global IPOs last week had some success even with pressure on the overall market. About You Holdings (YOUG.DE) was the largest of the names that debuted. Its $800M offering wasn’t a huge success, but it did end up on the week. The best performing new listing was Verve Therapeutic (VERV.O). It opened up more than 50% from it’s IPO price and ended the week up more than 100%.

The IPO calendar this week has some decent deals on it. The largest is Full Truck Alliance at $1.6B . Other larger deals are Bright Health at $1.4B, Confluent at $760M, Mister Car Wash at $640M, Doximity at $535M. There are also another half dozen smaller deals.

Best of the Week

The way I see it, we’re all sales people in some shape or form. I don’t quite know when I started thinking about that, but Daniel Pink agrees with that premise. He actuals says that as you rise up the ranks the amount of selling and persuasion increases. You end up selling in all directions, inside your business and out, and both up and down the organizational ladder. His latest book “To Sell is Human: The Surprising Truth About Moving Others” was great. There’s so many tips about connecting with people here, whether it’s to truly sell or just to have more success in the office.

Daniel Pink | To Sell Is Human - Listening time: 70 minutes

Best of the Rest

Mark shows some data around the Treasury Breakevens. His real point here is that inflation surprises have more of an impact on asset returns. I think his main idea makes sense if we see inflation coming it’s less impactful than when it comes out of nowhere.

Inflation surprises and the expectation catch-up in 2021

This piece came out prior to the Fed meeting, so a lot has changed since those comments. I still think the comments here from JP Morgan Asset Management are relevant. Their opinion that there’s a 90% probability that global GDP growth and inflation are above trend still holds. The Fed only indicated that it’s monitoring these and considering a hawkish tone. The closing thoughts from Bob noted that this “process of telegraphing how they would begin to adjust policy” needs to happen “sooner rather than later” or things might get more severe down the line.

Global Fixed Income Views 3Q 2021 -JPM Asset Mgmt

Another measure of the re-opening here from the Morning Brew team. People are buying less “things” and starting to pay more for experiences. As mentioned in the Earnings Watch, this is why I’m looking at Darden for comment. Yes, going to Olive Garden or Red Lobster is an experience. This means we might finally see some pressure alleviated on the supply chain. I haven’t seen any of the reopening industries respond as of yet though. Below is a look at the Refinitiv North American Restaurants & Bars sub-industry versus the wider Cyclical and Retailers indices over the last month.

Retail Sales Fall 1.3% as Consumers Turn from Goods to Services

Continuing with some content around the Russell Recon. This webcast was a detailed look at the use of derivatives by traders from the CME and CBOE in conjunction with my FTSE Russell colleagues. The index changes are effective at the open on Monday, so the vast majority of trades are done on the close on Friday.

Russell US recon: Mitigating risk with derivatives - Watch time: 60 minutes

This one is sort of news, but not new this week. We saw comments that the regulator was looking at possibly expanding reporting requirements. This is the next step. Getting feedback from the industry is one of the best things about the way this industry governs. We recently saw this with the 13F rules.

FINRA seeks comments on expanding short interest reporting requirements

Odd lot orders, which are generally an indication of retail traders, have been about 50% of the trades, but only about 12% of the total volume. This article dives into some of the details institutional traders should consider. In the end, this becomes an advertisement for some of the Clearpool tools, but that doesn’t take away from some of the good info that’s shared.

The Growth of Odd Lot Trading

The cost of liquidity is something every trader tries to explain to their customer, whether it’s a buyside trader or a portfolio manager. How much do you want to pay to get done "now"? This article touches on how much liquidity there is at any point in time from the NBBO midpoint out to about 50bps from mid. It also breaks down the S&P 500 constituents into four tiers, which allows you to see the huge amounts of liquidity available for the top market cap companies. There are a ton of charts here showing off different stats around the liquidity and it’s a quick read. The chart below is the first one and gives a good summary of the data. I think most traders know this conceptually, but the stats help understand these nuances better. This goes to show why good pre, at, and post trade analytics are important. Historical TCA is a nice way to help improve performance, but a great pre-trade and dynamic at trade analytics can really lead to better performance.

Liquidity Behavior in the S&P 500

There is a period before announcing financial results where a company enters a period where they no longer buyback shares. This period generally starts about two weeks out and goes until a day or two after. The odd thing is that this is not an actual SEC rule under 10b-18. There is research out there that this blackout period has no effect on price performance, but it will have some effect on volume. Before that though, it appears there have been a few more announcements in the last couple of weeks.

Buyback Blackout

Amazon Prime “Day” starts today and runs through tomorrow. It’s one of the largest shopping days of the year. My colleague Jharonne Martis, who covers retail for Refinitiv, wrote a piece on it. The event is earlier this year coming in Q2 versus Q4 last year. This huge school of shoppers has lured other retailers to the same waters. Jharonne notes that Target and Walmart have done more discounting during the same week as Amazon.

Amazon Prime Day Ignites E-commerce Competition

One for the Road

I found this one thought provoking. Nick is arguing against winning the money game early in life. He thinks gaining very large sums of wealth without earning it might cause you to lose your way. I’m not sure I agree with this, but I sure know that I wouldn’t mind an experiment of getting that money.

Don’t Win the Game Too Early

Finally, I hope all the dads out there had an amazing Father's Day. Next week I'll be off, as I'm taking an extended weekend break to go visit some more family. 

Thanks for reading. Hopefully things go swimmingly this week.

Michael