Monday, 18 December 2017

Is the Bond Market is Saying the Fed is Wrong about Its Latest Rate Hike ?

The TIP to TLT ratio is a good way of looking at inflation. Or to be exact, the market's view of inflation in the economy.

It certain paints a clear picture of how the market sees inflation since Trump's election.

TIP / TLT ratio chart since Trump election
TIP / TLT ratio chart since Trump election
(Click image to enlarge)

Followed immediately after the day of the election comes the euphoria of Trump's pro-growth fiscal policies. Markets expect the inflation goes to the moon, and many market pundits calling for the bursting of bond bubble. Some of these are very high profiled, highly respected names.

Not so fast!

The Trump Reflation or Trumpflation Trade was all the rage. Well, the rage party lasted a few months into the night. By March, markets see the cold light of day and realized that the Trumpflation Party was over.

Since March, this TIP/TLT formed a double top, and has been in decline ever since.


In 2 occasions, the ratio threatens to dive below the green line, which is the demarcation line for inflation expectation before and after the election.

During September, the start of the talk of tax reform gives this reflation picture a boost. As it turns out this is simply a bear rally within a broader bear trend since March when the Trumpflation Party ends.

Only 2 days after the Fed hikes rate by 25 bpts, for the 1st time since Trump's election victory that this ratio falls below the green line, signalling a new lower inflation expectation. Or that the market is disagreeing with the Fed in raising rate.

After all, one of the mandate of the Fed is keeping inflation under control by raising rate. This chart is telling us - by Mr. Market - that there's little inflation.

If this ratio keep falling further from the green line, the Fed is better easing up from the rate hike or risks killing the economic growth (and bullish stock market) prematurely, according to the bond market, at this point in time.

If this bearish trend continues, i can't see how the Fed can afford 3 rate hikes next year.




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