Market Commentary

Where We At?

While duration has chopped around, risk assets don’t seem to care and are marginally up since the term premium freak off.

Pinebrook’s take dispenses with the term premium valuation voodoo of risk-free rates and instead keeps it simple. Which is, the market was simply front running and getting ahead of what is now staring at us in the face: rebounding growth data in both the soft and hard data domains.

• In December, housing activity showed resilience despite higher mortgage rates and housing permits demonstrated strength, particularly in the single-family segment. Au contraire, this was not Pinebrook’s base case.

• Retail sales outperformed expectations on both a nominal and real basis. The GDP-relevant control group showed strong performance.

• Manufacturing production contractions showed signs of bottoming out.

• Soft survey data, including NAHB, NY Fed manufacturing & services PMIs, and Philly Fed Manufacturing PMI, came in stronger than expected.

• The above suggests a robust underlying momentum in the US economy, which increases the probability of the economy shaking off temporary weakness from natural disasters, post-election spending drop-offs, and unusually cold weather in January.

After the initial slowdown in growth in early Q4, the pick-up in growth later in the same quarter was stronger than these pages anticipated. As usual, what matters for markets is what comes next, not narrative cope.

We take our cue from last week’s benign CPI report and Fed Governor Waller’s dovish commentary regarding the forward policy rate path as the basis for a benign, mid-cycle macro back-drop for risk assets.