Another Dip to Buy?

Macro Perspectives: Tue 20 Jul 2021

Last Tuesday we talked about the foreseeable "spiking case" narrative, as cover for the Fed and for the government to maintain their ultra-aggressive policy stance.

Indeed, in the face of hot inflation data last Tuesday and booming earnings reported throughout the week, the Senate democrats announced a $3.5 trillion stimulus plan (with the creative label of "budget agreement"). Then Biden called on Congress for another $1 trillion for infrastructure, and then Jerome Powell visited Capitol Hill, confusingly continuing with his "inflation is transitory" drumbeat.

After yesterday, the "pedal to the metal" policies perhaps get a degree of validation (a "shot in the arm”).

The headlines are now kicking in, to drive the "soaring case" narrative. Though, like the inflation data, the case narrative comes with considerable "base effects”. Cases, driven by the variant, are rising, but compared to very low levels, as you can see in the chart below.

Still, Australia has locked down two of its biggest states and the chance of the U.S. administration returning to a lockdown is not zero. With that, markets reacted… Stocks traded to and closed slightly below above the 50Day moving average.

But as we've discussed, these declines in the post-financial crisis world, where the Fed is already aggressively engaging in intervention, tend to be short-lived (i.e. fully recovered inside of one month, in the majority of cases - and on to new record highs).