By EconMatters

Important Econ-Inflation Events

The Federal Reserve meeting begins Tuesday June 17th with the FOMC meeting announcement the following day Wednesday June 18th which will be followed by their forecasts and the Fed Chair press conference.

In the last Fed meeting a weak housing concern cropped up on the Fed`s agenda, but all the housing data has rebounded in the latest economic reports with the spring weather, and the new concern at next month`s Fed meeting will be inflation.

With two much hotter CPI & PPI reports the last two months and another hot set coming right before the Fed meeting with the PPI coming on Friday June 13th, and CPI coming out on Tuesday June 17th. We anticipate these reports to be on the high side of estimates with higher food, energy and rising wage cost pressures; and that the Fed will probably have to address these new inflation pressures in their statement and the following press conference by Janet Yellen.

We also think the Employment Report which comes out next week will show some rising wage pressures which are the real push through on the inflation numbers. We think the Fed and the market at large is way behind this inflation curve, the market is still trading and making decisions on numbers that came out three months ago, all the latest economic inflation data has been very hot, and well above expectations, with the consensus just thinking these are temporary data blips. However, a third hot round of CPI and PPI reports right before the Fed meets is going to raise some eyebrows and establish the inflationary trend that we anticipate will be with us for the next 5 to 10 years.

Bond Market: Mispriced Asset Class

The fallout from this is obvious the Bond Market in the United States is the most mispriced asset class right now and this time they are wrong, and equities are telling you that inflation is full bore upon us. Look for the S&P 500 to hit 2200 much sooner than most realize with the 2500 area pinging on the radar as investors run out of bonds and into equities as inflation heats up and the Fed starts raising rates much faster than the market has currently built into their models.

The Trade

Valuations can be a concern regarding equities, and who knows what type of volatility hits that market once Bond Yields spike so the best place to be from a risk reward perspective is long 10-year yields. Bond Investors are dangerously asleep at the wheel with the chasing yield fervor reminiscent of a Gold Rush that the best play is in the Bond Market. Start building short positions in the 10-Year Bond exposure area either through Futures or Treasuries, and do it now while yield is so low relative to where we believe it is headed over the next six months and beyond. If playing Futures just build a position and have enough liquidity to stay in the trade for the long haul, and keep rolling over your short Futures Price and Long Yield trade over the next six months.

This is one of the few times I am going to say this so pay attention, investors cannot lose on this trade if they get involved at these low yield levels in the 10-Year over the next six to nine moths time frame, this is essentially as free money as Wall Street ever gives investors, take advantage of it while it lasts.

The Fed will continue tightening based upon the good manufacturing and housing economic data of last week, and with the upcoming hot Employment and CPI/PPI Inflation Reports, this is really going to push the Fed into a stronger tightening mode. However, the Fed is going to raise rates regardless as they normalize monetary policy over the next six to nine months, Don`t fight the Fed, make money being on the right side of this trade, which is long yield and short price from where we are right now relative to 10-year treasury yields.

Positive EV & Risk Reward Profile

This is the best Risk Reward Trade on Wall Street right now but you have to get in while yields are mismatched with where the Federal Reserve is eventually going to be forced to go, so that your risk profile is better managed by having such an excellent relative entry price.

Investors will start jumping on the trade when 10-Year Bond yields reach 2.8% and we break out of the recent range from 2.47% to 2.70%. But the beauty of getting in when the market is “sleepy” is that an investor has much more room to manage the trade to the upside, and really let the trade breath, i.e., let the trend develop by getting in early, and let your winners run.

This isn`t a short-term trade, and an investor isn`t looking for a quick profit, i.e., nobody is concerned about inflation right now, hold the trade through when everybody is worried about inflation – this is how you really get paid as an investor for taking on the risk of the unknown.

And as ‘Unknowns’ go this is one of the surest or knowable ‘unknowns’ the Fed is going to raise rates, inflation is going to rise and be a problem in the future, and 10-year bond yields are going to be higher in the future, and as an investor find a way to play this market and monetary normalization process.

Inflation, Inflation, Inflation

But mark my words the topic de jure three weeks from now will all be about inflation and how the Fed needs to start raising rates much sooner than is currently priced in the market. Mark your calendar for the Employment Report next week, CPI & PPI Reports 13th and 17th, and the Fed Meeting Announcement on the 18th of June. Inflation pressures will be more than an economic blip, and these reports will reinforce this recent trend, and markets will have to adjust to this new paradigm.

We have now entered the Inflation Paradigm of the Fed`s loose monetary experiment, it is time to pay the piper for all this excessively lax money printing complacency. We all knew this day would eventually come, ‘the boy cried wolf too many times’ we then let our guard down, and boom inflation smacks us and the Federal Reserve in the face, and nobody is prepared for the absolute carnage in the Bond Market!

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