This chart overlays the spread between bullish investors and bearish investors (using the AAII survey results). The lower the line, the less bullish US investors are. Historically, readings this low are usually a good predictor of a spike in volatility. The VIX (inverted in the chart) has risen to as high as 22 to 25 which would be a doubling in the current level. However, the two most recent times we had a reading this low were earlier this year and a week or so ago. The VIX stalled at around15, showing the VIX sellers are happy to brush off the weaker investor sentiment.
I had a look to see how well the actual cash rate tracks this so called neutral cash rate [CPI +1%] since the GFC. It looks pretty good except the RBA ignored the rise in CPI in 2013-14 highlighted in the red square. The reason they ignored the rise in CPI was probably because the unemployment rate was rising then (vs falling now).
Persistent Low Inflation Causing Headaches for Central Banks
Central Banks want to remove stimulus but low inflation is making it difficult. The falling oil price is not helping but has not spread to all other commodities as yet but markets will be watching closely. For now bonds are in a holding pattern though. In Australia, the sharp selloff in the front end earlier this was overdone and we are resuming a grind up again in the bonds. Like the US and others, strong employment data does not cause high bonds yields these days.
4th Bank Bill over-reacted to the Aussie Bank downgrade and offered a good buying opportunity
Weekly Charts - Weak retail Sales ensures no rate hikes any time soon
Weak retail sales was enough to lift our market off the lows and the rally is being led by the banks bills as the market favours no RBA hikes for the foreseeable future. Some further flattening in 1year calendar spreads is probable over time although employment next week is needed to cement this view (it has been solid of late). Equities are just way too quiet and bearish seasonal patterns start to kick into gear from the end of May.
Bond markets are still pulling back from the highs reached two weeks at the peak of Geopolitical fears. Charts remain a little bearish but one has to wonder how far they can fall given the odds of a June Fed hike are above 90% and commodities are in a sharp dive (remember early 2015?). In Australia, the market has stepped back from pricing small odds of another RBA easing and is now building in a little more shape in the front end of the curve. This is what the RBA are telling us (inflation back in the band etc.)