Stargazer Asset Management Weekly – June 20 2022

Our weekly tour of markets
BY ERIC FILL

SAM Weekly _ June 20 2022

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Thoughts From the Divide:  The First Cut

BY JON WEBB
In love, the first cut may be the deepest (as per Rod Stewart, Sheryl Crow, and others). But for the Fed’s Waller, the first cut is to be done “methodically and carefully”. Tacky musical references aside, the Fed Governor explained in his speech earlier this week that “the data we have received the last few months is allowing the Committee to consider cutting the policy rate in 2024”. With inflation seemingly on the right path for reaching the FOMC’s “price-stability goal”, Waller was yet another confirmation of the adjustment cut thesis, explaining in his conclusion, “The healthy state of the economy provides the flexibility to lower the (nominal) policy rate to keep the real policy rate at an appropriate level of tightness.” Read more →

MI2 for C8 – JPY Liftshaft Alert

BY JON WEBB
There is a window emerging for position reduction in the widely held JPY carry trade. Positions are crowded at the same time that the rationale for the extension of the current benign regime is diminishing (carry, carry-to-vol, policy divergence, etc). There is no sense of danger within analyst expectations or embedded in option pricing. While we lack an immediate catalyst, sometimes price can be its own trigger. With USDJPY around 156 and an easily defined stop loss, the risk reward of engaging with JPY strength is compelling. Escalator / liftshaft price action provides significant convexity. Crowded JPY shorts would also need to be covered in the event of a risk-off catalyst coming from other asset classes. Owning USDJPY puts can be an attractive portfolio hedge for investors concerned about general market complacency or for more active tactical FX managers and traders. Read more →

Thoughts From the Divide: Avoiding the Inverse

BY JON WEBB
Along with the release of the January Fed minutes this week, there was a deluge of Fed Speak, with Jefferson, Harker, Waller, and Cook all opining on the outlook for cuts. Most of the refrain was along the lines of Powell’s need for “confidence”, with Waller saying that he needed “to see at least another couple more months of inflation data” and Cook echoing the idea, saying that “as we gain greater confidence that disinflation is ongoing and sustainable, that changing outlook will warrant a change in the policy rate”. Harker pushed back on immediate cuts, asking for markets to “just give us a couple of meetings”, following up by saying, “I would caution anyone from looking for it right now and right away”. But while there may be some pushback on timing, that cuts are coming appears to be very much fait accompli in the mind of the Fed. Read more →
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