US Housing costs rise again
Well, the US CPI came in stronger than consensus, while stocks experienced a slight sell-off, contrary to our expectations. The credit markets showed a relatively firm/muted response. Rent and shelter costs have once again become a focal point. Despite our hypothesis, there was no reversal in month-on-month shelter costs, which were grounded in the rent calculation methodology. Craig’s theory of convergence between mortgage and rent costs seems on track.
Inflation expectations
Regardless, a 3-4% US CPI seems entrenched in the market psyche for the foreseeable future. Based on investor surveys, a bet towards the upside of the range (>4%), or persistent inflation, offers the best risk-reward. Apart from this, we have no strong fundamental view on US inflation. There are valid arguments on both sides that are well-balanced.
All else being equal, an unexpected decline in US inflation is a scenario we deem less favorable for US equities than the consensus view. That is, based on historical statistics, further significant declines in Personal Consumption Expenditures (PCE) inflation are an inevitable consequence of a recession.
QT ending sooner than expected?
A positive new development in the US interest rates market is the potential for an earlier than expected termination of the Fed's quantitative tightening (QT) program. It's a story that has, so far, not gained much attention. The key determinant is the level of excess reserves in the banking system.
March or June Fed cut is inconsequential for most people
The ongoing debate about whether the Fed cuts short-term borrowing costs in March or June is largely inconsequential to most market participants, but it matters to a minority of speculators.
For us to do well, others must do badly
It's been a while since we got a nice alignment between qualitative and quantitative analysis with market technicals on a trade view. Of course, there's always a chance that we're not seeing the opportunities. Usually, price action leads, which fuels a narrative. The narrative then evolves into an investment thesis. That's when we have a field day. Unfortunately, a lot of the day-to-day job of a market trader involves capitalizing on mistakes made by others in some shape or form.
Opportunities in FX Markets
The best trading opportunities seem to be in currency markets. Unfortunately, most of the best risk-reward trades we highlighted go against fundamentals. The two currency pairs we highlighted are long SEK/JPY and short AUD/CAD. The latter is a more interesting and unique potential trade we identified.
Grifols Shares continue to slide after investor call
Grifols held a special investor call yesterday to address the allegations of fraud and tunneling transactions leveled at the company by Gotham City Research (GCR)—we have not listened to or analyzed the call. The stock has since continued to slide lower.
We highlight this name because it is a constituent in several benchmark European credit derivative products, meaning many market participants have exposure.
Poster child of Barcelona biotech
Grifols is the poster child of Barcelona's vibrant biotech industry, so the ramifications for the broader industry are not insignificant. For many in biotech, the opportunity to live and work in Barcelona is more appealing than a long commute to and from the industrial parks of South San Francisco.
Dig a bit deeper
We recommend looking beyond the GCR-associated hedge funds' actions, which may be motivated by Profit & Loss (P&L)-related circumstances, to dig a little deeper. Almost every equity analyst covering Grifols SA was bullish on the stock before the GCR report was published. First, there is hope, eventually changing their minds when it's too late. At least, that's usually how it goes.
The company has already removed all analyst ratings from its website, after just yesterday promising to be more transparent with investors in the future.
Russia-Ukraine war
For several months, we have argued that the 5-year war of attrition, which became central to most investment theses, is an unlikely outcome.
Here is a very detailed podcast on the Russia-Ukraine war with Michael Kofman and Shahank Joshi from The Economist. Kofman has been the best analyst on the topic we've tracked since before the outbreak of the war in February 2022.
According to Kofman, Ukraine's war effort is doomed if the US withdraws or holds back its support. Recent Plan B proposals by European allies to consolidate and focus efforts, while interesting and proactive, are unlikely to help the battlefield prospects for Ukraine.
Israel-Hamas, Houthis & ICJ
US-allied-led strikes conducted overnight against Houthi targets are unlikely to encourage international cargo ships to traverse the Red Sea and Suez Canal. Perhaps the plan is to escalate tensions to the point where Chinese and Russian ships are also discouraged from taking the maritime route. This would add pressure on China and Russia to urge the Houthis to halt their attacks. The Houthis are adept at evading onslaughts of US-guided missiles from better-established bases nearby.
Here is a good FT podcast interview with Kim Ghattas by Gideon Rachman. Ghattas' work is excellent and on point.
Mandela's lawyer leading the charge against Israel
Meanwhile, representatives from Israel are busy defending themselves against charges of potential genocide in Gaza brought against them by South Africa at the International Court of Justice (ICJ). Professor John Dugard, 87, who was Nelson Mandela's lawyer, is leading the South African prosecution team in what is likely to be his swan song. The lawyers defending Israel spent half of this morning's session presenting an “I called you, but you never called back” defense in their opening arguments.
South Africa is very likely to win, but it won't change much
South Africa has asked the court to consider the charge of potential genocidal intent, rather than a definitive ruling. The ICJ is likely to rule in South Africa's favor by the end of the month and request Israel to cease and desist its operations in Gaza. The ruling will be put forward as a UN resolution, which will almost certainly be vetoed by the US. Other UN Security Council members will feel more obliged to vote in line with the ICJ ruling.
In practice, not much will change on the ground except that the US will find itself amongst an even smaller group of nations resisting calls for a ceasefire.
