2024.01.06 Weekly

Tightening II

DoejiStar
3 min readJan 6, 2025

I expected the market to soon enter a tightening regime in early October giving decent weight to the risks that the FOMC could deliver a hawkish-cut or a pause in November in response to the continually strong US data. Powell stuck to his usual script and the November FOMC was a non-event.

December proved more eventful — data pointed to further moderation but wage growth remained strong, inflation data showed upside risks from goods that could be further compounded by the incoming tariff-man, and finally the December FOMC signaled an emphatically hawkish shift by the committee with the dots guiding to 2 cuts in 2025 as opposed to 3, and a higher neutral/terminal above 3%. Developments in December may have laid the foundation for the market to trade under a tightening regime in the coming months.

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I noted last week that 1) cyclically themed assets were unlikely to find relief until there is some clarity on Trump’s policies, and that 2) global macro is unlikely to find relief from strong US rates and dollar until US growth concerns returnsboth of which doesn’t look like happening anytime soon.

10yr term premium put in a huge rebound over recent months and although some assets have responded, US equities have not been as perturbed as prior episodes.

Nonetheless momentum roll over as the growth-supported move in yields took the form of tightening with breakevens easing while real yields moved higher into year-end.

That transition now mildly points to a tightening regime.

10yr real yields may find some resistance at these levels but is technically strong. A move higher and a flatter 10s30s would be consistent with a tightening regime — will be paying close attention to this chart.

US equities have rolled over in December while VIX has had poke higher. A continuation of December moves would be consistent with the regime change.

Metals and Energy tend to falter under a tightening regime. Both are holding up well and I favour shorts so long as real rates continues to chip at the highs.

Higher-beta FX tend to perform negatively under a tightening regime. That said, they are tactically attractive at current levels and would be my focus on fading or temporarily shelving the tightening view. I would also be tempted to do hedge starter position before top-tier data releases against my long USD short equities book as weak data see yields ease off and remove some of the headwinds that has weighed on broad risk.

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That’s all for now — good luck trading!

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DoejiStar
DoejiStar

Written by DoejiStar

Weekly Macro Trading Journal

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