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Why Powell must crash equities

David Llewellyn-Smith
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More terrific charts from the Market Ear.

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Is there anything bullish happening in Europe?
German 1 year baseload power overlaid with the BTP/Bund spread.
Refinitiv
Euro at parity, but…
…Citi’s economic surprise index between Europe and US has managed to hold “recent lows”. Yes, the latest move since mid June has been down, but the gap is rather wide vs soggy euro…
Refinitiv
What if Europe doesn’t go to hell?
Europe is in extreme pain, but what if they “sort it out”? Credit protection has been the most sensitive measure of risk over past months. If you see Europe “surviving” this coming winter, then credit protection trades too high, on a relative basis. Charts shows iTraxx main (inverted) vs SX5E futures.
Refinitiv
Europe – diverging “fear”
Credit and equity protection are pricing the European mess slightly differently. European equity protection is not overly rich, at least not on a relative basis. More on this via GS here.
Refinitiv
EU inflation
Goldman’s summary indicator of underlying inflation increased in July…driven by a broad-based increase across measures we track.
Goldman
Goldman
Powell needs to “crack markets”
TS Lombard’s Steven Blitz latest note can basically be summed up with:

“Powell’s first problem is that inflation coming off the boil does not create the needed slack in labour markets – this requires a sharp downturn in equities. Why equities? Because this has been an asset cycle, not a credit cycle, and rich assets are this cycle’s source of economic distortions.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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