May 9, 2021

The reflation trade was back on last week. Commodities continued to trade higher on optimism around global growth with copper prices rising to the highest level in a decade, iron ore and lumber hitting multi-year highs and crude jumping 3.2% last week. Despite commodities ripping higher fears of inflation remained rather tame and the U.S. 10 year yield declined 4.5 bps to end the week just below 1.58%. Sector rotation continued in equities with the DJIA up 2.7% and the S&P up 1.2% on the week while tech continued to struggle leading to 1.5% drop in the Nasdaq; even the Russell 2000 small cap index fell 1%. European bourses gained between 1.5% and 2% last week, while the Asia Pacific stock markets posted modest losses. Our BSD Global Tech Hedge Fund retreated 1.7% as investors continued to use 2020 tech gains to fund their cyclical stock investments. With the cyclical rally, though, also comes overbought levels, and in the case of financials, materials, and energy, they all closed out last week at ‘extreme’ overbought levels. Our Fund has considerable downside protection with the 55% short equity indice hedge together with the ‘laddered’ Nasdaq put option positioning. Now is the time to ‘keep our powder dry’ and await for a clearer reading for market direction.The U.S. consumer price index is the big item for markets in the week ahead, as the focus shifts to inflation fro

m the weak April jobs report. We expect the core index to have gained 0.3% for the second month in a row. As a result, the annual core inflation rate could move up from 1.6% to a 14-month high of 2.2%. Headline prices, meanwhile, could have risen 0.2% m/m. This gain, combined with a strongly positive base effect, should allow the annual rate to rise from 2.6% to 3.6%, the highest figure recorded since September 2011. In other news, the recovery in industrial production should have continued in April. We are calling for a 1.4% monthly gain for industrial production. Still in April, retail sales should have continued to advance, as some high-contact segments (e.g. eating/drinking establishments, clothing) likely benefited from the loosening of social distancing rules in several states. Headline outlays may have increased 1.7% m/m, thanks in part to yet another progression in auto sales. Ex-auto retail sales may also have expanded, albeit at a slightly weaker pace. We’ll also keep an eye on the release of April’s NFIB Small Business Optimism Index and March’s Job Openings and Labor Turnover Survey (JOLTS). Several Fed officials are scheduled to give speeches, notably Charles Evans (Monday), John Williams (Tuesday), Lael Brainard (Tuesday), Mary Daly (Tuesday), Richard Clarida (Wednesday), James Bullard (Thursday) and Robert Kaplan (Friday). Earnings season continues in the week ahead though most of the rush is over for the quarter. All of this will add up to a week of volatility across all of the asset class mesh.