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May
18
2022

Stocks Puke As TINA Unwind Accelerates
Tyler Durden

Remember the rally yesterday and how great that felt... "is the bottom in?" etc... yadadadada... Well... it's gone...

US equity futures are tanking after the cash markets open, taking out yesterday's lows...

As Nomura's Charlie McElligott notes, it appears this is the potential unwind of the "TINA" phenomenon, as, thanks to the repricing of the risk-free rate - then pushing into yields on spread-product - "there is an alternative" to equities once again.

And this aligns with something that has increasingly come up in conversation with Multi-Asset investors into said potential for an “economic cycle downshift,” but one that does not see a “systemic” shock increase in default cycle, as Corporate balance sheets have been cleaned-up - which is the relative attractiveness of IG Credit in particular, which now has handsome Yield again, but of course too is “up” in capital structure versus Equities

And as the chart above shows, IG spreads are at a somewhat critical level too - The Fed has typically folded like deck-chair at around this level of risk.

However, as McElligott notes, there was a clear “hawkish” directional tilt and even another “signal” from Jay Powell yesterday, acknowledging increased likelihood of “hard-landing” risk

  • On over-interpreting / “cherry-picking” inflation data for signs of progress, or the potential for “pause” when the hit they perceived ‘neutral’ rate: “Truthfully, this is not a time for tremendously nuanced reads of inflation.  We need to see inflation coming down in a convincing way.  That is what we need to see.  Until we see that, we are going to keep going.”

  • On running “restrictive”: “What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that.  If that involves moving past broadly understood levels of ‘neutral,’ we won’t hesitate at all to do that.”

  • Notable that this was the second-consecutive interview where he noted that that this is going to tough-sledding: “There could be some pain involved in restoring price stability.”

  • Further: in order to get inflation down to 2% target, “..we have to slow growth to do that...(but) we don’t have precision tools.”

So maybe it's different this time for Powell's Fed and he will let financial conditions tighten deeper and for longer than anyone since Volcker? We suspect a lot will depend on Biden's polls... and we know which direction that is heading.

 



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