2024.09.16 Weekly

‘Narrative drives momentum’, until…

DoejiStar
7 min readSep 16, 2024

It’s been a very good month — playing around a similar August setup and rebound, until I decided to call the markets bluff on the 50bps cut — via USDJPY longs and particularly Gold shorts. If I had sit tight and just waited for the narrative to change a little bit, I would have been far better off as far as this month’s pnl goes and I’m reminded of what someone had told me recently:

Much of this momentum has been from the idea of aggressive rate cuts, and still think it is very misplaced in that I think there is a good chance of growth and inflation reaccelerating, and if so, rates are very mispriced here.

Thematically, I continue to favour the dovish-unwind theme — while I continue to run core long NDX, I’ve initiated tactical shorts on SPX, long USDJPY and short Gold to start the week. More on those ideas below…

DATA REVIEW

Headline CPI came in as expected, but Core-CPI was a little hotter at 0.3% (0.28% unrounded) vs 0.2% expected, causing the 3month annualised rate to pick up back into positive territory. This is largely owing to shelter inflation which saw a +0.5% m/m increase after +0.4% the previous month — not the Blue ex-shelter line has continued to fall lower.

Both Headline and Core PPI came in above expectations, but this seems largely owing to downward revisions to the prior month (from 0.0% to -0.2% for Core, +0.1% to 0.0% for Headline). This keeps the 3month downtrend stalling at the 2% pace.

Unemployment claims with a very slight beat at 230k vs 227k expected, but taking the seasonal adjustment into consideration, this is a very good print. In fact, on non-adjusted basis, 178k is the lowest since September of last year where NSA initial claims average approximately 179k in that month.

US consumer sentiment rose to the highest reading since May, while 1-year inflation expectations fell to the lowest in nearly 4 years at 2.7%.

Fed Consumer Credit changes isn’t market moving data, but it does help to get a sense of whether consumers are getting access to to credit and therefore their ability to spend (also included yr/yr Retail sales in Red). Last month saw the biggest monthly increase since late-2022 implying strong consumer spending. While higher levels of outstanding credit could hamper spending further out, a resilient labour market with strong wage growth still makes this a positive development in my view.

Small business optimism index pulled back after a sharp rise recently. This had the bears on twitter salivating once again saying the usual “engine of the economy”, the “mom and pops” as an early recession signal which, historically is a terrible recession indicator, and even worse as a cycle/market-timing indicator. The old adage ‘the stock market is not the economy’ comes to mind — cope harder bears.

LOOKING AHEAD

It’s FOMC week where markets are exactly split on whether the Fed will start with a 25 or a 50bps cut. Before that we have Retail Sales and given the strong increase in Consumer credit last month, I think there is a possibility for an upside surprise.

Elsewhere:
- Canada CPI and Retail sales
- UK CPI
- AU Employment and NZ GDP

and a good number of central bank decisions this week.

EQUITIES

SPX has rallied back to a potential inflection point where it had last capped the August rally, and runs into the rising trendline marked in Yellow once again, as well as the 161.8 fib extension. While short-term momentum is very bullish, I think the trade for this week is tactically to the downside while maintaining a buy on dips bias for the medium-term.

Similarly NDX has reached a key pivot area around 19500/750 which has proved to be a strong hurdle to rally beyond so far. It’s about to its 3rd touch of the trendline which I think will be respected this week, and beyond that, perhaps some more consolidation and coiling for an eventual breakout to new ATHs.

RUT/NDX ratio has once again solidified the support level around 0.11. Market is loving the prospects of aggressive cuts and should that narrative continue to stay alive, I would expect this ratio to shoot higher. I do think the market is getting ahead of itself on that expectation and would be interested to see whether this ends up trading below support again.

It’s also OPEX this week where Max Pain level for the big Sep20 expiry is approximately 3% lower than the last Close. Given how the charts are looking and the event-volatility up ahead, as well as the idea that rate markets are priced too rich against what I think will be a 25bps cut, there is a good possibility that SPX will gravitate lower towards 5500 levels and 5425.

Given all of the above, I have scaled back on NDX longs last Friday and have initiated short SPX for the week ahead.

COMMODITIES

Bloomberg commodities index is attempting to justify the support level it has flushed on two occasions. It’s certainly looking more like a durable base so far.

Energy sub-index is showing signs of putting in a recovery. Chart is looking constructive with RSI breaking out and price above the initial 23.6 fib. I’m currently trading around Brent Crude longs looking for a recovery back to around the $76/bbl handle.

Industrial metals sub-index is eyeing up a breakout, which would eye the 38.2 and 50 fibs (Copper to ~$4.5). I can see it grinding back higher given US growth outlook is still looking strong, and China on the mend, though it may be a slow one it appears they have hit rock bottom.

Precious metals sub-index is looking exceptionally strong. I have got seriously burned trying to fade the rally last week, and I’m in danger of staying stubborn on this given my view that US rates have gotten much too dovish, and an unwind there could derail this rally. I therefore continue to attempt trading tactical shorts on Gold.

RATES

Yield curve continued to shift lower with the dovish front-end expectations driving the overall bid in USTs. The rally has slowed significantly and the next move should be decided by this week’s FOMC.

Market is fairly split between 25 and 50 (marked by the horizontal White lines) looking at the October Fed Funds contract (Orange). Also shown are the November (Purple) and December (Green) contracts which I could see revert to their next upper horizontals should the Fed go with a 25bps cut and signals that the pace will be gradual until it becomes appropriate to up the pace.

As the economic data has yet to suggest that a faster pace is appropriate, I think the risk is those expectations to pare back from here, and yields recovering higher.

Technically, the charts are looking ready for that unwind as well.

CURRENCIES

USDJPY is the main currency chart on my mind for this week. It’s flushed the 28th Dec 2023 low and 140 handle, with Demark sequential 9 countdown on print today. I bought the 140 handle earlier on the views expressed above and think we could see quite a violent short squeeze in USDJPY should it play out.

That’s it for now. Good luck out there and have a great week!

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