Tech Recovers, Inflation Trade Loses Stream

The pullback in Treasury yields has helped the tech-heavy Nasdaq 100 to outperform the Dow Jones Index by the most in seven weeks. Meanwhile, Wall Street’s great inflation trade has lost stream. 

The inflation gauge retreated from multi-year highs, while the S&P 500 was largely stable. Even the value strategy finally came to an end, after posting the biggest gains since the GFC earlier this year.

Nevertheless, reflation rally may still be refueled ahead following new business cycle booms and renews investor conviction. According to JP Morgan Chase & Co., positions held by money-managers in inflation-sensitive assets including commodities is still below post-2008 peaks.

The recent economic data releases saw a pause in the trend change, investors are still gauging for further signs of inflation momentums.

Bucking the norm, this month, the 2-year breakeven gauge further outpaced 5- and 10-year levels, which is a clearer message to reflect the market-derived expectations of price growth.

Stocks on the other hand have taken cues from the signs of easing inflation in the bond market. Bets on cyclical companies and benefits from higher rates (a long-short value strategy) have dropped by the most this week since mid-April.

Bets in low volatility and quality names have picked up. This is a sign of defensive investors seeking potential growth in earnings rather than betting on companies that are closely linked to economic expansion.

Hedge funds are waiting on the sideline. Clients are adding exposures to both cyclical and growth shares at JPMorgan’s prime brokerage, suggesting the bets on both sides of the inflation debate.

Key events this week (Economic Calendar):

  • RBA policy decision (Tuesday)
  • OPEC+ meeting on oil production levels (Tuesday)
  • US unemployment data for May (Friday)

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