2024.07.15 Weekly

Fight!!!

What a weekend! Trump getting his ear shot off, then being dragged off the podium with an epicly powerful gesture — fist pumped in the air and mouthing “fight! fight!”.

I spent some time reflecting on the lasting impact about the Trump trade that kicked off some moves to start the week which, in a nutshell — higher inflation, higher yields, stronger dollar. I’ve concluded that I don’t think this changes the near-term outlook on markets — 1) it was looking more and more like a Trump win anyway, and 2) there is such a strong dovish backdrop driving markets that I think that backdrop will largely ‘trump’ Trump...

Other than some tactical short term ideas in commodities and FX, I maintain similar views of prior weeks which largely follows the Q3 seasonal schematic (very bullish in July, volatility pick up in August, then a typically bearish September) that ties in with a number of narratives and scenarios that could materialise over the coming months. I still don’t see any reason to turn bearish risk though technicals do warrant a high degree of caution.

Data review

Both CPI and Core missed expectations for June on a seasonally adjusted basis, -0.1% vs +0.1% expected and +0.1% vs 0.2% expected respectively. Food and shelter prices grew 0.2% m/m but softer Energy prices resulted in an almost flat +0.03% headline inflation for June on unadjusted basis, Core was rounded up from +0.065%, CPI ex-shelter was -0.08%, and Core ex-shelter and used cars was flat.

Conversely, PPI was hotter than expected coming in at +0.2% vs +0.1% expected and +0.4% vs +0.2% for core, but the big increase was due to trade services where Core PPI ex-trade services was 0% for June.

Personal consumption less Trade services was +0.08% for June. Morgan Stanley notes “internals that go into the PCE were benign” and that there is “good odds for PCE to look very similar [to the last print] with core around 0.1% and headline around 0%”. BofA also notes: “In terms of the details that matter for PCE. Components used for medical services were weaker this month than last. PPI for physician offices fell 0.4% m/m on an NSA basis after a 0.8% increase in May. Hospital services increased by a more modest 0.1% compared to 0.6% m/m in May. On the flip side, PPI for airfares rose 1.7% m/m after falling in each of the last two months. This is in start contrast to the 5% decline in CPI, but the data are not seasonally adjusted (NSA). Finally, components of PPI that affect financial services rose this month. Portfolio management was up 1% m/m after a 1.2% m/m decline in June. Overall, the PPI data that affect PCE were softer this month than last”.

All in all, a good month of inflation prints pointing to continued softeness in PCE and also highlighting the surge in inflation in the early part of the year is subsiding once again.

Initial claims missed at 222k vs 236k expected, on an unadjusted basis however — Initial claims showed 241k which was incrementally higher from 239k the previous week and inching closer to the pre-pandemic 3yr average at around 245k. As noted before, I don’t believe this is anything to be alarmed of and still very short of being an early recessionary signal.

NFIB Small Business Optimism Index continues to rebound printing the highest level so far this year and outlook on business conditions is the highest in almost 2 years.

But they remain cautious with no intention to increase employment or expand despite seeing improving business/economic outlook.

Consumers were less optimistic the past month according to preliminary UoM survey results. Inflation expectations are softer again however with 1 and 5yr expectations at 2.9% and returning to levels seen at the beginning of the year before going as high as as 3.3% and 3.0% during the 2nd quarter.

UST auction results:
- 3yr auction — 0.8bps through
- 10yr auction — 0.9bp through
- 30yr auction — 2.2bps tail

I anticipated decent auction results while noting that the 30yr could be the interesting one given the higher CBO revision and potential return of Trump to the WH. Sure enough, it was —a large 2.2bps tail!

Looking ahead

It’s a quieter week on the US calendar with a few fed speakers and smaller UST auctions on deck. Retail sales should be the key event risk with the previews I’ve seen point to weaker consumer spending in June.

Elsewhere we have ECB meeting this week, Inflation data from the Canada Japan UK and German PPI, Payrolls data from UK and Australia as well as UK retail Sales to highlight a few. China’s 3rd Plenum also underway — there is some historical precedents of past 3rd Plenums delivery some major reforms, so this should get a lot of focus for risk and perhaps more so for commodity markets.

Plenty of important names report this week.

We’re entering the thick of earnings season with 2/3rds of SPX market cap reporting into the end of July; TSLA is noted here as this week but looks to be an error as I see it scheduled for the week after on the 23rd.

NEWSFLOW

MARKETS

• S&P 500 Tops 5,600 Mark in Longest Rally This Year (BBG). Stock Big Tech Tumbles Most Since 2022 as Rate Bets Spur Rotation (BBG), Russell 2000 beats Nasdaq 100 by the most since November 2020 (BBG). Goldman’s Rubner Sees a Selloff as Next Pain Trade for Equities — models large outflows from the US stock market in August, ‘Best trading days of the year are now behind us’ (BBG). Morgan Stanley’s Wilson Says a 10% Stock Market Correction Is ‘Highly Likely’ — US election in November and rate outlook among mounting risks, Pullback may offer opportunities, valuations ‘unexciting’ now (BBG).
• European Stocks Rise as Waning US Inflation Lifts Sentiment (BBG). Retail Investors Pull Record £1.8 Billion From UK Equity Funds — Outflows in May highlight sluggish performance for UK stocks (BBG). BlackRock Bets on UK Stocks as Labour Win Signals Stability — Britain, Spain most favored European stock markets: BofA (BBG). The Time to Buy UK Small Caps May Be Here (BBG).
• US Federal Reserve chair Jay Powell hails ‘considerable progress’ in tackling inflation — Central bank underscores that next US interest rate move is likely to be a cut (FT), US economy no longer overheated, Fed’s Powell tells Congress (RTS). Powell says Fed will cut rates when ready, regardless of political calendar (RTS). Traders Start to Bet on a Supersized Fed Rate Cut in September — October fed funds futures began flying off shelves Thursday, Price implies a half-point move is likely to be considered (BBG). Treasuries Wipe Out 2024’s Loss as Traders Bet on Rate Cuts (BBG), Big Bet on Treasuries Needs Benign Inflation Data to Survive (BBG). El-Erian Says US Politics Threaten Chances of September Fed Cut — Fed’s ‘biggest fear’ is having to hike again, possible data, inflationary shocks complicate easing (BBG).
• Oil Rises for Third Day as Time Spreads Signal Stronger Demand — WTI’s prompt spread strengthens to highest since October, US benchmark climbs to trade above $83 a barrel in New York (BBG). OPEC Data Show Oil-Cut Laggards Still Exceeding Supply Limits (BBG). Global Oil Demand Growth Slows Further as China Cools, IEA Says (BBG). European Gas Prices Rise After Global Supply Risks Resurface (BBG). China’s PBOC Keeps Gold Buying on Hold for Second Month — PBOC goes second consecutive month without purchases (BBG).
• Pound Bulls Savor Labour Victory With Rate Cuts Seen Delayed (BBG), Pound Rises to One-Year High as Outlook Brightens for UK Economy, UK currency rises to $1.2949, highest since July 2023 (BBG). Emerging-Market Currencies Hit Highest Since May on US CPI Data (BBG). Dollar’s Strength to Persist Through Next Year, HSBC Says — HSBC’s Maher sees DXY gauge ending 2025 around current level, Greenback to draw support from yields, resilient growth (BBG). Bitcoin’s Correlation With Tech Breaks Down Amid Supply ‘Overhang’ — Looming supply overhang of Bitcoin affects confidence, Spot sales from seized coins held by US, Germany tolls prices (BBG).

AMERICAS

• Monthly US consumer prices post first drop in four years as inflation subsides — Consumer price index falls 0.1% in June, CPI increases 3.0% year-on-year, Core CPI gains 0.1%; rises 3.3% year-on-year (RTS). US producer price data points to subsiding inflation pressures —
  PPI excluding food, energy and trade unchanged (BBG). US weekly jobless claims fall more than expected — Weekly jobless claims fall 17,000 to 222,000, Continuing claims decline 4,000 to 1.852 million (RTS).
• US Consumer Sentiment Falls to Eight-Month Low on High Prices — Short- and long-term inflation views declined in early July, University of Michigan consumer sentiment index drops to 66, “Almost half of consumers spontaneously expressed complaints that high prices are eroding their living standards, matching the all-time high reached two years ago” (BBG). NY Fed finds moderating near-term inflation expectations in June (RTS). US small business sentiment rises to six-month high in June (RTS). US Consumer Borrowing Rises Most in Three Months on Credit Cards (BBG). Big US banks warn of stress among lower-income consumers (FT).
• Biden Mixes Up Kamala Harris and Donald Trump After Doing the Same With Zelensky and Putin (NYT). Joe Biden vows to ‘complete the job’ despite stumbles in press conference (FT). Democrat Confronts Biden Over His Determination to Stay in Race — Party remains in conflict over president’s ability to defeat Trump with more than a dozen saying Biden should step aside from the 2024 race (WSJ). Economists Say Inflation Would Be Worse Under Trump Than Biden (WSJ), Trumponomics would not be as bad as most expect — the “Trump trade”, a bet that Donald Trump’s return to the White House would herald more inflation and higher interest rates (Economist).

EUROPE

• Faster UK economy growth gives gift to new government — UK GDP grows 0.4% in April, stronger than expected, Data further dampens expectations of a BoE cut in August, Upturn in economy represents boost for new Labour government, Trade data show weak EU exports (RTS). Bank of England chief economist points to ‘persistence’ of underlying inflation — Huw Pill’s comments cause traders to scale back expectations of UK interest rate cuts (FT). UK housing market stays muted but optimism builds, RICS survey shows (RTS).
• Pick-up in wage growth raises doubts over scale of ECB rate cuts — Closely watched tracker from Indeed website hits 4.2%, up from 3.5% (FT). German exports fall more than forecast in May (RTS). German inflation confirmed at 2.5% in June (RTS). German growth package offers limited boost, say economists (RTS). France’s election outcome ‘negative’ for credit rating, Moody’s warns (RTS).

ASIA

• Japan steps up yen warnings, data suggest intervention (RTS), Japan Likely Spent $22 Billion on Yen Intervention Thursday (BBG). Japan households’ inflation expectations heighten as wage hikes broaden, surveys show — Nearly 90% of households expect prices to rise a year, from now, Ratio of respondents seeing price hikes 5 year ahead rises, Inflation expectations may help BOJ justify rate hike, Survey shows wage hikes broadening among smaller, regional firms (RTS). Japan’s base pay rises by most in 31-years, part-time workers see robust gains (RTS). Japan consumer inflation to quicken as BOJ weighs interest rate hikes: Reuters poll — Core inflation seen picking up to 2.7% in June (RTS). Japan’s wholesale inflation picks up as weak yen raises import costs (RTS). Japan’s government set to trim economic growth forecast, sources say (RTS).
• Investors Sour on Chinese Stocks as Plenum Seen Lacking Potency — Sinking stock turnover, foreign outflows show worsening mood, Investors have little hope of boost to market from Plenum (BBG). China to Skip Quarterly GDP Briefing as Xi Holds Party Conclave (BBG). China exports rise at fastest pace in more than a year — Falling imports drive record trade surplus in June as Beijing leans on manufacturing to support economy (FT). Taiwan June exports tops forecasts on AI demand, U.S. market soars (RTS). China’s Credit Growth Weakest on Record as Demand Languishes (BBG).

EQUITIES

Global equities have recorded yet another record high and close last week. Both ACWI and the ex-US ACWX index has pushed above its upper trendline but as I’ve noted last week, these technical structures though very bullish, warrant caution.

Developed markets EAFE index is carving out a rising wedge pattern with a record close last week with a small wick off the upper trendline. Emerging markets ex-China index EMXC continued its breakout run but RSI is the most overbought since January 2021 and the height of the post-covid crash meltup.

SPX reached the target 5625–40 target area last week from where we saw sharp rotational moves in the market.

One of the most talked about is the Russell small caps / Nasdaq100 spread which saw the 2nd biggest 1 day performance in 20yrs last Thursday.

NDX mustered a 1.79% the next day on Friday but was unable to close on a strong note finishing +0.59%, and -0.30% to print a weekly doji wicking down from the 161.8fib. There are some decent technical signals on the chart to compliment a potential trend change implied by price action — demark countups and momentum oscillators showing early indications of rolling over.

Speaking of rotations, SPX Growth/Value put in a sharp reversal of the prior week’s move and Russell1k spread printed a weekly 9 countup. Daily 9 countups also marked the top of the reversals in both spreads, suggesting there could be more to this rotation. I do not think however, that this is necessarily bearish for NDX or SPX, but rather that it is net positive for markets as there is meaningful broadening and lesser concentration risk in mag-7.

I noted some potential coiling up in the Small and Mid-caps index PRFZ, and we saw a sizeable breakout on the Thursday rotational moves. Friday did print a doji star candle suggesting it may need a little breather and consolidation from here.

Similarly, the most-shorted index has also broken out as anticipated, indicating that market sentiment is in very good health.

There was a slightly more defensive tone last week as the cyclical-defensive spread pulled back from record highs, but I suspect this is symptomatic of broadening than of reduced risk appetite.

Lastly for US markets, put premiums are off the lows but still at very low levels, meanwhile 1-month implied correlation made new ATL last week signifying very little fear overall.

Europe bounced back last week with the Stoxx50 up +2.07% mtd and +1.64% for Stoxx600. It starts the week on the backfoot today and I remain skeptical of European markets being able to replicate the strong performance seen in the early half of the year given the political fragility, high debt levels, and weak industrial production as trade relations with China remain somewhat ‘frictitious’.

Asian markets look reasonably healthy overall. Despite that, Nikkei’s run looks done here hitting the channel top and reversing -2.45% lower today; Kospi’s early month breakout has stalled but still holding up around its recent highs; Hang Seng and Shanghai composite looks to be in accumulation and ready to explode — some sweeping reforms out of China’s 3rd Plenum will definitely give that technical picture a boost.

COMMODITIES

Not much has changed across the commodities indices. Agriculturals continue to sag lower following the usual seasonal weakness during this time of year; Energy also continuing to pull back mostly driven by plummeting NG prices; Precious metals stays buoyant on a more dovish US rates backdrop; Industrial metals continues to hover around a key pivot area.

Spot Gold is at an interesting price level finding some resistance around the left shoulder highs, making vulnerable to a surprise rise in US yields and Dollar. With Trump’s campaign seemingly emboldened by the failed attempt on his life, we could see some Trumponomics dynamic creep in which tends to favour a stronger USD, in theory. A favourable retail sales and unemployment claims print this week could trigger a small retracement in Gold and on my radar for a tactical trade this week.

Crude price action is also particularly interesting also showing a potential reversal pattern here from the mid-80s. Prompt spread has surged higher but showing signs of reversing and I think this offers some quick tactical trading opportunities to the short-side while being mindful that positive news from China’s 3rd Plenum could quickly change sentiment in commodity markets. Besides that and zooming out, I think Crude remains a buy on dips particularly below 80 while there are reports suggestive of supply being light against a pick up in demand again.

RATES

The bid in UST’s continues… The 10yr is roughly 30bps lower since the beginning of June and 20bps lower so far this month and the curve is slowly beginning the bull steepen with the 2yr 42bps lower since the beginning of June and almost 30bps lower so far this month.

2s10s is beginning to breakout and looks like to be on track to uninvert by the end of the current quarter if inflation prints continue to come in soft.

Technically, I see the US 10yr in the 4.1%~4.25% range for the near-term . Stronger prospects of Trump returning could give yields a lift at times, but I it will be faded with inflation and labour market data being the dominant driver for now and both of which points to continued moderation.

CURRENCIES

• USD — I stay bearish on the Dollar especially via USDJPY shorts. I find the dovish narrative too strong against any Trump driven strength.
• CAD & MXN — some selling pressure after the weekend perhaps some knee-jerk fear on Trump’s protectionist policy tendencies. I do think these are buys however as I believe the dovish US rates backdrop will remain the dominant driver. I favour USDMXN but having made the 50fib retracement with a demark 9 countdown printed last Friday I stay very cautiously short, meanwhile USDCAD has broken its range to the upside but into a very thick band of resistance and would favour shorts here also with some caution:

• JPY — saw a huge reversal with suspect MoF intervention post-CPI release. This should put off JPY sellers for now until something warrants a reversal in rates to the upside. BoJ meets at the end of the month and I suspect they could be signalling something more with inflation expectations going higher and broadening wage growth. USDJPY has printed a weekly evening star pattern and I still see ample room below for a further retracement:

• EUR — I expect upside to be very sluggish if not capped by the limited growth potential amid high debt levels. ECB members have also been adamant on maintaining a slow pace of rate cuts and should there be a not-so-dovish leaning on Thursday, selling high ones in EURJPY or EURGBP could be the way to go.
• GBP — for months I’ve commented on the what I perceived to be extreme pessimism around GBP with wage growth still strong and UK data showing incremental improvements. It’s surged on improved GDP and political optimism but I now wonder whether if its getting overplayed — too much too soon? As long as UK CPI doesn’t surprise to the upside, I think EURGBP is a good tactical long here — ECB may pushback against faster pace of cuts, GBP beginning to look expensive vs rate spreads, technical move looks overextended with a weekly demark 9 countdown printed last week and daily 13 combo and sequential countdown today:

• AUD & NZD — still holding the same bias of bullish AUD and bearish NZD as fundamentally strong themes. I see AUD having more upside room with AUDUSD eyeing the highs from the beginning of the year, but should AU payrolls come in weak, I think there is a tactical reversion trade in AUD given the strong run-up over the past month. Not exactly a high conviction idea, but something on the radar:

That’s it for this week, good luck trading.