2024.09.02Weekly
For many months, my views have been centred around the idea that there will be positive reflexivities to inflation coming down. More recently, this view was central to buying against the frankly ridiculous narratives fitted to the August black-Monday sell-off that was mostly driven by technical reasons. Now, that sell-off is a distant memory with SPX finishing the August month +2.28% higher and within a whisker of making new all-time highs.
Going forward, I continue to think that the positive reflexitivies will be what continues to drive the risk rally into year-end, and why I have dismissed the typical elections related seasonality/volatility against what I think is a an even stronger fundamental backdrop for markets.
So far this quarter, we are seeing some rough evidence of that positive reflexitivity. After a period of normalisation from a very strong 2023, then a brief inflation reacceleration scare at the turn of the year, we are now seeing inflation come back down on trend towards 2.5% and economic surprises beginning to turn higher. This points to a healthy medium-term outlook as everything in real-terms continues to improve.
A potential growth reacceleration into year-end could present some ‘stickier inflation — higher-for-longer’ risks, but so long as the Fed goes ahead with their adjustment cuts even though they may see r* netural rate being higher, as well as barring another inflation shock, I don’t think higher-for-longer risks will be an issue for markets. In other words, it’s mostly about growth and less about inflation and I therefore see the balance of risks remaining skewed to the upside.
Data review
Some good data all around…
GDP came in stronger than the initial Advance estimate of 2.8% at 3.0%, further highlighting a strong growth acceleration driven by strong consumer spending and private inventory investment.
Monthly PCE printed +0.2% in July for both headline and core measures and in-line with consensus. On an unrounded basis (as per the chart), both monthly measures came in below 0.2% — the level at which it needs to stay capped for inflation to be seen moving sustainably to 2%. On a 3month annualised basis, headline PCE is now running at 0.9% and at 1.72% for core. While inflation is on the right track, incomes and spending further highlights the resilience of the consumer — spending was +0.5% as expected while incomes increased +0.3% above the +0.2% expected.
Initial jobless claims came in at 231k vs the 232k expected — although only a slight miss on expectations, the fact that this is a period where we see strong seasonal adjustments higher makes this better than it might appear. Continuing claims also came in slightly below expected with some downward revisions to prior weeks and overall rising trend since June slowing into a stall.
Looking ahead
Busier week on the macro calendar, the usual set of labour market data to kick-off the new month as well as ISM PMIs.
Trading views
Pro-USA via a growth reacceleration resulting from a positive reflexivity to inflation coming down while the economy is in good shape. I stay pro-risk and becoming increasingly bullish on the US dollar on relative value basis.
I therefore continue to maintain core long NDX and AUDCHF AUDJPY since the black-Monday sell-off, short EURAUD added later in the August month, pro-USD positions from last week’s open via short EURUSD and long USDJPY, and short XAUUSD initiated today.
I’m also looking at trading around long Energy theme in the coming weeks.
EQUITIES
Trend momentum remains strong in global Equities. The All countries world index ACWI made new record high last Thursday and record close on Friday.
SPX and NDX pointing to another leg higher as it sets up to break out of its recent consolidation structure and RSIs still far from signaling immediate caution.
The ease at which European stocks has recovered surprised me given how weak European growth is. Stoxx50 was down as much as -8.19% before finishing +1.75% for the August month, while Europe’s SMids index Stoxx600 made new ATH last Friday.
Quite the crash and recovery in Asian equities — Nikkei and KOSPI have surged back to their 50 and 61.8 retracements and should prove stable at these levels.
Interesting divergence between the Hang Seng and the Shanghai composite finishing August up +3.72% and down -3.28% respectively, the latter of which surprised me given there has been plenty of chatter of new stimulus measures.
COMMODITIES
Bloomberg commodities index has mean reverted to its year-beginning levels with RSI resetting back to the 50 mid-line. Price action isn’t directionally convincing but I think it’s starting to form a longer term base here.
- Agriculturals picking up heading into the September month following a typical seasonal trend out of the summer harvest.
- Energy stays in a slump. Though OPEC is looking to increase production quotas, I’m not sure this is going to send Oil prices much lower from current levels and seasonality into Winter months tending to favour Energy prices also.
- Precious metals recent breakout and consolidation not looking entirely convincing and could be rolling over like I think it could do, more below.
- Industrial metals consolidating after the August bounce back, which I suspect is in the process of building out a longer-term base.
Crude I think is a tradeable short-term range low —an important pivot area going back the last year, support level in March then May (marked by the Yellow arrows) before a flush out lower in June with a quick recovery back above (Red), then higher lows back to the shaded pivot area with some thicker accumulation on the last 2 lows in August (Green). Nat Gas has flushed the prior swing low and showing constructive price action thereafter which I think could be another tradeable low also.
I also like Gold for a number of reasons. Technically we have printed a Demark weekly 9 countup with negative RSI divergence and looking ripe to reset lower. Looking closer at the price action, we’ve seen some failed attempts to breakout higher and beginning to lose some key pivots.
In view of long Energy and short Precious metals — Energy tends to track growth sentiment, while Precious metals tends to react inversely, and if the surprise index rebound is to continue, I think those ideas have a good chance of working out.
RATES & FX
Rapid pace of cuts and slowdown concerns has driven the rally in bonds and gold, but I don’t buy into the prospects of cutting 50bps, and while economic data is pointing to a resilient growth outlook while inflation is on track towards 2.5%, I see more upside to yields provided data continues to print to that effect — above is the 10yr yield (Green) vs the economic surprise index.
UST yields are up all up since Aug-2nd (Green), front-end is lower over the recent weeks since Aug-16th (Purple) while the longer end continues to grind higher to reflect the low inflation and strong economic data.
US 10yr yields has broken out of its consolidation and eyeing a move back to the 4% handle and potentially above it if this week’s labour market data proves strong. Given the flow of recent data and this technical setup, the path of least resistance looks higher.
With growth strong and inflation coming in, I expect real yields to inch back towards the 1.9s%. As I think it will be higher in a relatively quiet manner, I don’t expect this to be a problem for risky assets though I do see it impacting major USD-pairs (e.g. USDJPY higher, EURUSD GBPUSD lower as fast money also feels very short dollars still) as well as Gold — above shows 10yr real yield vs XAU inverted.
That’s all for now, I bid you good trading!
