MacroVoices #290 Juliette Declercq: Are Cyclical Indices Positioned To Outperform?

Episode Summary

Executive Summary: Macro Voices episode 290 framed the post-FOMC market as a brief correction rather than a trend break: equities snapped back, oil strength resumed, gold remained weak, and bond yields jumped on taper expectations. Guest Juliet de Klerk argued the reflation trade has unwound, but inflation’s second-round effects—especially wage gains, labor shortages, and rising bargaining power—could keep yields elevated, support cyclicals/small caps, and challenge the Fed’s transitory-inflation view.

Main Topics: Equity Market Correction and FOMC Reaction (Priority: 5/5): Eric and Patrick debated whether the S&P 500 selloff was a meaningful correction or just a short-lived response to tapering concerns. The view leaned toward the dip being bought and the market stabilizing above key moving averages. U.S. Dollar Consolidation and Potential Upside/Downside Breakout (Priority: 4/5): The dollar was described as range-bound, near the top of its consolidation range, with no confirmed breakout yet. Eric said the setup could still resolve higher, but for now it remained a swing-trading range market. Crude Oil Bull Market Resumption (Priority: 5/5): Oil was the clearest strength trade on the show. Both hosts and Juliet saw a resumed rally driven by persistent demand, supply constraints, and post-Ida production disruptions, with targets above $80 and potentially over $100 in 2022. Gold Weakness and Breakdown Risk (Priority: 4/5): Gold’s failure to sustain a recovery above short-term moving averages was viewed as technically bearish. The discussion emphasized a failed rally and a possible close below support signaling a downtrend. Rates, Tapering, and Treasury Yield Breakout (Priority: 5/5): The 10-year yield’s move to around 1.40% after the FOMC was framed as the bond market absorbing taper news rather than a policy error. The broader implication was a possible continuation of the yield recovery if inflation and wages persist. Juliet de Klerk’s Macro View: Inflation, Labor, and Reflation (Priority: 5/5): Juliet argued the early-2021 reflation trade has unwound, but the bigger story is that supply-chain bottlenecks, labor shortages, and rising real wages may create second-round inflation effects. She sees structural labor changes, reduced labor supply, and stronger bargaining power as market-relevant forces. Rotation into Cyclicals and Small Caps (Priority: 4/5): Juliet and Patrick both highlighted that cyclical equities, European banks, Russell 2000, and reopening trades like airlines may be poised to outperform if the market rotates away from mega-cap growth and if yields and inflation expectations remain firm.

Key Arguments: The S&P 500 selloff likely represented a tactical correction, not the start of a larger downtrend, because the market quickly reclaimed the 100-day/50-day area after the FOMC. The U.S. dollar remains range-bound; until it breaks out of consolidation, the move is not yet a confirmed trend. Crude oil’s bull market has resumed after an August pause, with inventory draws and ongoing demand supporting a move above $80 and possibly $100 in 2022. Gold looks technically vulnerable because a failed breakout and rejection at moving averages suggest a bearish trend. The 10-year yield’s rise to 1.40% reflects market absorption of taper expectations rather than a major policy mistake, but it may be the start of a broader yield recovery if inflation persists. Juliet argues that the reflation trade of 2020-2021 has fully unwound, mainly due to supply bottlenecks, higher costs, and the Delta variant depressing activity. She distinguishes first-round inflation (self-limiting higher prices) from second-round inflation (wage-price spirals), arguing the latter is more important and potentially reflationary. Labor shortages are structural, driven by retirements, changing worker preferences, savings cushions, and disincentives to return to old jobs; this should lift bargaining power and wages. Inflation is shifting wealth from capital holders toward workers and could support aggregate demand if wage growth outpaces prices. The Fed may stay dovish on rates because labor supply recovery will be slow and unemployment may take years to normalize. Markets should favor long forward breakevens, cyclical equities, European banks, Russell 2000, and short duration / short 10-year exposure if yields trend higher. Dollar upside is expected to fade again if the cyclical rotation and inflation narrative evolve as Juliet expects.

Data Points: Macro Voices episode: 290 - Episode identifier in the intro Recording date: September 23, 2021 - Episode intro and market discussion timing S&P 500 drop: 2%-3% - Patrick described the one-day breakdown before the rebound 50-day moving average: Reclaimed after brief break - Eric said the market bounced back above the 50-day after the correction 100-day moving average: Touched for about a day and a half - Eric described the brief downside test during the correction U.S. dollar level: Around 93.50 - Patrick referenced the August highs in the dollar index Crude oil drawdown: 3.5 million barrels - Weekly inventory report discussed by Eric Cushing inventory drawdown: 1.5 million barrels - Weekly oil inventory report Gasoline inventory build: 3.5 million barrels - Weekly oil inventory report surprise Gasoline total drawdown: 2.6 million barrels - Despite the build, gasoline inventories still fell on net U.S. production: 10.6 million barrels/day - Production increased but remained below pre-Ida levels Production still offline due to Ida: About 0.5 million barrels/day - Eric said Gulf of Mexico output remained impaired Crude target range: Above $80 and below $92 - Eric’s expected price range for oil before year-end Oil 2022 target: Over $100 - Eric’s longer-term bullish view Gold level: 1750 - Gold’s short-term trading area mentioned in the intro Gold resistance: 1830 - Juliet noted repeated resistance at this level 10-year Treasury yield: 1.40% - Yield breakout discussed after the FOMC Short-term yield move: 10-15 basis points - Eric said the move was notable but not dramatic Global bottlenecks index: Peaked but still extreme historically - Juliet referenced chart four in her deck Asia new orders: Fell into contraction for the first time since July 2020 - Juliet used this to explain softer demand signals Quit rate: At all-time highs - Juliet used this as evidence of labor market rethinking Potential early retirees: 3 million over age 55 - Juliet cited survey data on early retirement interest Real wage growth in services since early 2020: 3.1% - Juliet described real wage gains in service sectors Real wage growth in leisure and hospitality since early 2020: 6% - Juliet highlighted strong gains in a low-wage sector Real wage growth in financial services since early 2020: 5% - Juliet compared service-sector wage gains Germany inflation reference: 3.9% in August - Juliet said unions were basing wage claims on realized inflation UK underlying wage growth: Around 5% - Juliet referenced Bank of England estimates France job offers: Up 10% to new record highs - Juliet cited labor demand strength in France High-income household savings gap: 3 to 3.5 percentage points more of national income than in the 1980s - Juliet referenced Kansas City Fed analysis

Pivotal Quotes: "I think that was probably it." — Eric Townsend: Eric’s view that the S&P 500 correction likely ended after the brief post-FOMC selloff "I think inflation killed reflation from the beginning of the second quarter, triggering a correction in the global yield uptrend and a curve flattening." — Juliet de Klerk: Her core macro thesis explaining why the reflation trade faded and yields corrected "The second run of inflation should be friendlier to the working consumer, who should be able to use his new found bargaining power to achieve substantial real wages gain." — Juliet de Klerk: Her argument that wage-driven inflation can be economically healthier than goods-price inflation

Implications: Listeners should watch for a rotation into cyclicals, small caps, banks, and energy if yields and wages keep rising. The Fed may stay dovish on rates, but persistent labor tightness could keep inflation sticky and pressure duration, gold, and growth leadership.