2024.06.17 Weekly

Reflexivity

DATA REVIEW

• 0.0% m/m CPI missed 0.1% expected, down from 0.3% prior
  0.2% m/m Core CPI missed 0.3% expected, down from 0.3% prior
• -0.2% m/m PPI missed 0.3% expected, down from 0.5% prior
  0.0% m/m core PPI missed 0.3% expected, down from 0.5% prior
• 242k initial claims beat 225k expected, up from 229k prior wk
  1820k continuing claims still steadily rising from 1790k prior wk
• UoM Consumer sentiment falls to lowest in 7months

Lower inflation, softer labour market and consumer sentiment data points to the likelihood that the Fed could cut more than the 1 they had indicated in their dot plots.

Market has responded by pricing in 2 full cuts by year end with the Dec’24 SOFR at 4.83%, which is exactly 50bps lower from the effective fed funds rate of 5.33%.

Looking ahead we have Retail sales and S&P PMIs into OPEX Friday, as well as some UST auctions and Housing market data.

REFLEXIVITY

I’ve been talking a lot about ‘reflexivity’ lately (taking the term from my mate Tim Vollans), and I see this being a risk when expectations have swung from one extreme to another.

With the market fully priced for 2 cuts towards the end of this year, and assuming it highly unlikely we expect any more than 50bps, I think risks are skewed towards disappointment than vindication — i.e. more of the same data and pricing is justified and doesn’t move a whole lot, some hotter data however and we get a slightly hawkish repricing. With the market perched for perfection, I could see those risks being big enough to be corrective catalyst.

Take for example the disinflation trend we saw in the 2nd half of 2023 which got the ‘Fed will cut as much as 3 or 5(!) cuts’ narrative going — we saw consumer and business sentiment rebound strongly and the economy was running hot again along with inflation accelerating briefly. Although to a lesser extent this time round (and not to say that I think this scenario is ‘highly’ probable), I see the same reflexivity risks ahead — that is, fresh optimism that inflation is coming down will keep business and consumer sentiment (aggregate demand) afloat while the economy remains in a sensitive state to Food and Energy prices.

Risk view

I still maintain a tactically bearish stance. A look back through my journal does show that I’m at least two-weeks too early on flipping bearish but as I sift through the charts while considering how supply-chain and geopol risks have been evolving recently, my level of confidence has taken another notch higher that the markets are ready for an orderly correction until those risks come to pass.

NEWSFLOW

MARKETS

• Stock Bull Run Breaks Record on Fed Decision Day (BBG). Rally in Stocks and Bonds Will Power Past a Hawkish Fed, Survey Shows (BBG). Consumer Optimism About Stocks Hits Three-Year High, NY Fed Says (BBG). Big Tech — not the Fed — is driving the stock-market rally (MW). BofA’s Subramanian Says Things ‘Kind of Awesome’ for Stocks — Probability of recession, stagflation is 10% or less, Sticks to year-end S&P 500 target of 5,400, near current level (BBG). Goldman Sachs Boosts S&P 500 Target on Upbeat Profit Outlook — lifts index’s year-end estimate to 5,600 by 2024’s close (BBG). Nvidia Eclipsing Apple Threatens Radical Shakeup of $67 Billion ETF — XLK fund investors have missed out by not owning enough Nvidia, Chipmaker’s weight could jump above 20% from 6% in rebalance (BBG). European Stocks Sink by Most Since April on French Election Risk — Emmanuel Macron calls snap election after Marine Le Pen victory (BBG). Citi Sees Profits Lifting European Stocks to New Records in 2025 (BBG). US Corporate Stockpiles Grow, Soaring to Record $4.11 Trillion — Robust economy allows companies to boost cash buffers, Significant increase seen in time deposits, money-market funds (BBG).
• Fed leaves rates unchanged, sees only one 2024 cut despite inflation progress (RTS), “The Fed is saying that the last mile to get to 2% inflation will be longer, but the market still believes in a decent growth and labor outlook that will gravitate toward a soft landing” (RTS). The Fed refuses to celebrate — For good reason (FT). Stung by Past Mistakes, a Wary Fed Takes Its Time (WSJ). Kashkari Says Fed Well-Placed to Take Its Time Ahead of Rate Cut — Says if Fed cuts once in 2024, it would be toward year’s end (BBG). Fed’s Mester Sees Inflation Risks to Upside Despite Better Data (BBG). ECB could wait several meetings between rate cuts, Lagarde says (RTS). Bank of England set to bury Sunak’s pre-election rate cut hopes — any lingering hopes Prime Minister Rishi Sunak might still have for a pre-election interest rate cut will probably be dashed next week (RTS). Bank of Japan to trim bond buying, keeps rates steady — BOJ keeps rate target unchanged, keeps bond buying pace at 6 trln yen per month, BOJ to lay out details on bond-taper plan at July meeting, Ueda signals chance of July rate hike (RTS), Consumer Optimism About Stocks Hits Three-Year High, NY Fed Says (BBG).(BBG).
• Oil Posts Weekly Rebound From OPEC+ Dip as Fuels Show Strength — WTI settles above $78 a barrel to notch 3.9% weekly gain, Traders bought dip after last week’s selloff deemed overdone (BBG). OPEC+ Unlikely to Raise Oil Output in 2024, Energy Aspects Says (BBG). Joe Biden ready to reopen US oil stockpile if petrol prices surge again (FT).
• World Container Shipping Rates Keep Rising Amid Port Congestion — Rates on key Asia routes topped $6,000 per 40-foot container, Red Sea attacks, early peak season demand pressure spot rates (BBG). Singapore Port Container Logjam Worsens as Ships Avoid Red Sea — Route around Africa pushes more maritime traffic to city-state, Port’s utilization rate at 90% compared with 70% optimum level (BBG). Commodity Ship Hit by Drone Near Yemen Is Taking on Water (BBG). Red Sea Attacks Drove 90% Decline in Container Shipping, US Spies Say (BBG).

AMERICAS

• US inflation falls to 3.3% in May in boost to markets (FT), “After three months of veering off-track, the disinflation bus is back on the road to 2%” (RTS). Treasuries Gain as Mounting Data Point to Softer Inflation, Jobs — US producer prices surprise with biggest decline since October, Auction of long-dated bonds lured strong investor demand (BBG). US import prices post first drop in five months in May (RTS). US weekly jobless claims at 10-month high; inflation cooling — Weekly jobless claims increase 13,000 to 242,000, Continuing claims jump 30,000 to 1.820 million (RTS). US small business sentiment up in May — NFIB Small Business Optimism Index rose eight-tenths of a point to 90.5 (RTS). US Consumer Sentiment Unexpectedly Falls to Seven-Month Low (BBG). US Home-Purchase Applications Rise for First Time in Five Weeks (BBG).
• Trump Floats Tariff Hikes to Offset Some Income Tax Cuts — Trump spoke with Republicans on Capitol Hill Thursday, US brings in much more money from income taxes than tariffs (BBG). Trump Tells GOP He Plans to Entirely Reverse Biden’s EV Policy (BBG). Summers Says Trump Economic Ideas Are Most Inflationary He’s Ever Seen — ‘Mother of all stagflations’ looms with mix of curbs on supply, demand, warns of 10% mortgage rates, Summers urges GOP-leaning economists and executives to speak up (BBG).
• Mexico’s Peso Sinks as Sheinbaum Embraces Judicial Reform — President-elect to prioritize several constitutional reforms, Concern about major changes to judiciary led to peso selloff (BBG). Mexican Peso ‘Pandemonium’ Shows Signs of Abating as Positions Clear — Fund managers cut bullish bets by most since March 2020 (BBG). Mexico Rout Spares One Asset: Bonds From Pemex Are Ticking Higher (BBG).

EUROPE

• Britain’s Labour Party pledges ‘wealth creation’ and said it would be “pro-business” as it targets landslide election victory (CNBC). Labour Victory Would Be Best Outcome for the Pound, Survey Says (BBG). Labour raises £350k more than Tories in first week (BBC). U.K. Economy Slows, Underlining Government’s Challenges as Elections Loom — GDP was flat in April compared with a month earlier (WSJ). UK mortgages in arrears hit near 8-year high (FT). UK Housing Market Loses Momentum as Interest-Rate Cut Hopes Diminish — RICS says gauge of new buyer demand drops to six-month low, Housing market emerging as key battleground in July 4 election (BBG). UK public inflation expectations fall to lowest in nearly 3 years (FT).
• Taylor Swift’s London Eras Tour could delay Bank of England rate cut, analysts say (CNBC). Swedish Core Inflation Unexpectedly Speeds Up as Taylor Swift Fans Boost Hotel Prices — Core inflation accelerates for the first time in over a year, Hotel prices rose as Swift played three concerts in Stockholm (BBG).

ASIA

• Japan core inflation set to accelerate, keeping BOJ on track for more rate hikes — economists polled showed core inflation likely accelerated to 2.6% year-on-year in May (RTS). Japan’s Producer Inflation Hits Fastest Clip in Nine Months (BBG). Japan May wholesale inflation jumps, complicates BOJ rate hike path (RTS). Japan’s service sector mood hits nearly 2-year low in May (RTS). Japan’s Q1 GDP fell less than first reported on revised capex (RTS).
• China May retail sales beat expectations, but industrial output and fixed asset investment missed (CNBC). China’s inflation steady, maintains pressure for more stimulus (RTS). China new bank loans rise far less than expected in May as demand wobbles (RTS). China Credit Gets a Lift From Bond Sales as Loan Growth Slows (BBG). G7 threatens China with further sanctions over Russia war support (FT). Europe must work out what role China will play in its decarbonisation agenda (FT). Renewables chief says Joe Biden’s China tariffs risk slowing green transition (FT). Tariffs will do little to slow BYD’s advance in Europe (FT). Chinese automakers overtake U.S. rivals in sales for the first time, report shows — Chinese brands sold 13.4 million new vehicles last year while American brands sold about 11.9 million units (CNBC).
• Australia May employment tops forecasts, defying economic slowdown — Net employment rose 39,700 in May from April and outpaced expectations as firms took on more full-time workers while the jobless rate dipped back to 4.0% from 4.1% (RTS). Australia’s trade with China surges to record level after tariffs lifted — Premier Li Qiang visits miners and winemakers as Canberra and Beijing put trade dispute behind them (FT).

EQUITIES

Global Equities have been unable to make much progress higher over the past month or so with US equities making new record highs has been offset by the weakness in Developed (mostly Europe) markets last week:
+1.58% SPX
-4.23% EAFE Developed markets
+0.45% EEM Emerging markets
+0.85% EMXC Emerging ex-China

Starting with the weakest — Europe’s Stoxx indices, charts suggests there is some room to go before expecting some form of relief — Stoxx50 with approx -4% after breaking below the double-top neckline, Stoxx600 with about -2% to complete the measured trendline break move.

The Nikkei, the other heavily weighted index in the EAFE Developed market index is also beginning to show a corrective pattern, while the Hang Seng has made a sizeable pullback and trading on the heavy side.

While SPX continues to push higher, there is a sign of narrowing participation in the rally with the SPX equal-weight index rolling over and the diverging price action is rather stark… as SentimentTrader analyses, this acute narrowing in participation is typically a near-term exhaustion signal:

Providing additional evidence regarding the narrowing in leadership, on Thursday, the percentage of S&P 500 stocks outperforming the S&P 500 index over a rolling 21-day period fell to the second-lowest point in history, at 18%

Similar relative trends suggest stocks could struggle in the near term. Whenever more than 70% of S&P 1500 sub-industry groups fall within 5% of a 6-month relative low against the S&P 500, the world’s most benchmarked index tended to struggle over the subsequent month. From a long-term perspective, returns and win rates were okay. The S&P 500 experienced a significant rally following the previous instance in May 2023, but at that time, it had been consolidating for almost six weeks, which contrasts with the current situation. Interestingly, not a single instance occurred in the late 1990s when leadership narrowed. However, concentration was more broad-based within Technology, whereas today, it’s a handful of mega-cap stocks.

PRFZ small/mid-caps index as quite often the case reflecting that underlying weakness outside market leaders. It’s huffed and puffed so far this year and it is now looking structurally weak.

Most-shorted stocks index as some sort of ‘sentiment strength’ indicator (i.e. sentiment is strong when the most-hated stocks are rallying and v.v.) is threatening to break back below the trendline.

NYFANG+ has returned to overbought territory and at first glance, a natural correction would probably set its sight on the 50 fib of the last leg which would take it back to May lows and 23.6 fib of the October low. That would be about an 8.5% pullback while a pullback to the major trendline would be almost 15% which would seem too much in the absence of some hot inflation/NFP prints or commodity prices doing a moonshot.

As with closely monitoring the small handful of mega cap stocks driving the rally, I think these indicators are worth closely watching for added confidence of an orderly correction. Also and rather interestingly, NDX/SPX ratio has made new ATH surpassing the one made in January with a weekly Demark 13 countup printed last week. More NDX demark observations here.

Looking and the strongest NDX stocks last week, I closely observe price action around these levels: AVGO 1,744.23 fib extension to cap the rally and a retracement back below the upper parallel trendline at 1,646.82; ADBE 50 fib retracement level to cap the rally at 536.11; ORCL to confirm a top with a retracement back below the upper trendline at 134.34.

NVDA reached the 2.618 extension with a strong close just under it, I watch for a lower high and close below the trendline (which could have been drawn to the last cycle low but as to satisfy my general 3-touch trendline rule, it should be a reasonably strong guide for now and has also been a decent pivot line over the past week); AAPL fell short of the 1.618 fading -3.5% off the high at 220.20, weekly RSI has reached 70 and daily is showing some bearish harami’s suggesting possible upside exhaustion and price below 209–210 should provide some confirmation to that.

MSFT though reslient is stalling at at key fib level around 442 and could print a demark 9 countup after today’s session, I look for that signal to come through and rejection bar closing below the 440 level; META printed a 9 countup last Friday with price action fading from above 505 which is approximately the intermediate base level of the prior bearish-divergence top in March, and I would think a rejection bar and close below the 500–505 area would signal a corrective leg.

On top of what looks like a stretched rally from the charts observed so far, SDEX and TDEX has come off the Thursday low indicating rebounding demand for put options.

COMMODITIES

I’ve got a close eye on Energy commodities at the moment given my focus is almost entirely on the broad equities complex making a correction. Going from left to right — Crude has made a sharp recovery from the OPEC+ dip and threatening to put in another bull leg, Natural Gas prices still look constructively bullish after building a base in the early 3rd of the year, and Gasoline prices appear to have based and coiling up for a move higher.

An Energy rally would throw some doubt on the disinflationary progress the markets have been quick to celebrate but technicals do suggest a reasonable possibility of higher Energy prices that would throw a spanner into the immaculate disinflation narrative.

Gold could also be signalling something with regards to how assets, namely bonds and Dollar could trade in the near-term, as covered below. There are numerous exhaustion signals printed over the past month, and daily momentum still retains a negative bias despite the bounce back over the last week or so.

RATES & FX

US treasuries and now (Orange) 40bps lower since the start of the bull run that began at the beginning of May (Green), with last week’s move (Purple and change in Red) accounting for half of that bull run.

10yr yield was back at key support at 4.2% last Friday and I would be suspicious of a continued move lower while the US economy is holding up just fine so far, though some cracks are beginning to emerge via Jobless claims data and business hiring sentiment. 10yr real yield has also tagged the key 2% level and has shown strong reluctance to go any lower, which going back to Gold and Dollar — would likely pressure Gold lower and keep USD strength lingering on. Also to bring in my point on ‘reflexivity risk’, I now see risks being skewed towards higher yields than lower from here which, if it were to play out, would take away a big tailwind the tech-stock rally has enjoyed in recent months.

1y1y (top) and 5y5y (bottom) inflation swaps is likely to stay in favour of the US (Green) over (Europe) between the World’s 2 major currencies with European sentiment taking a hit from French political risks as well as a focus on EU tariffs against Chinese EV’s.

Looking at G8 FX:

• EUR at intermediate support but looks at risk of a further breakdown with sentiment souring. GBP bearish reversal bar last week trading heavily into recent lows. CHF may be stretching overbought but my view to sell against carry-fx has turned out be an awful and ill-timed idea. European political and economic slowdown risks is likely to keep the CHF strong and I will put it on hold til I take a more positive risk view.
• USD and CAD (as a lower beta Dollar) are looking constructive for more gains. I think the risks are towards a higher USD via either a rebound in yields or as a higher yielding safe-haven. There is a lot downside in the price for CAD and rebounding Energy sectors could help to give it a lift as will its tendency to closely follow USD strength.
• AUD and NZD are looking tired and if we are to see a pullback in risk as I anticipate in the near-term, I see these reverting lower to their 100 dma’s. JPY continues to stay persistently weak and even though there is a slowdown narrative developing in the major economies, I’m once again dissauded from attempting tactical longs as it still seems some ways off til it can compete with say the USD or CHF.

That’s all for now, good luck trading!