2024.10.21 Weekly
My core view was centred around US yields and dollar being hugely mispriced and both have rebounded well over the past month. Even after that big adjustment, I still see more upside risks for US rates and in particular, further USD strength trading on both sides of the Dollar-smile — US exceptionalism over other major economies as exhibited via widening rate differentials on one side, Elevated geopolitical risks that could be made worse for some economies if Trump wins on the other. While those are thematically strong reasons to stay pat on the long USD book (and I’d ideally want to keep some exposure to a potential Trump win), big data and QRA the following week makes me more cautious as we near month-end.
I’ve also taken a tactically bearish view on SPX which was in part motivated by the huge repricing in US yields, but not only were Equities unnerved by those moves, the extremely high-skew acting to protect vol from spiking and equities to sell off has weakened my tactical view. That said, I do see risks of rate-sensitive assets (that have rallied off the back of rapid interest rate cut expectations) having to adjust to H4L theme coming back if data continues on the current trajectory — the risks of which I think is great underappreciated by the market. With recent momentum slowing down and observing some intraday weakness last week, we could be just a headline away from giving the market a reason to enter a corrective leg amid many uncertainties. Market has proved me wrong however, weakened my conviction, and for that I remain cautious my view may not be a good one.
DATA REVIEW
A strong retail sales report to add to the robust US data trend seen over recent quarters — Core was 0.52% vs 0.1% expected and 0.2% prior, ex Autos & Gas was 0.74% vs 0.3% expected and 0.2% prior. Some pointed to the big down month on non-seasonally adjusted basis but those takes seem like ‘cherry-picking the data’ to suit their own narratives. Retails is probably one of data set where adjustments should be accepted for what they are as it would be near-impossible to draw conclusions from a noisy series with large, and highly “seasonal” swings as the below chart shows.
And to the “adjustment was huge” retorts — yes, it was a strong one last month but within historical norms. Even if the adjustment was not quite as strong, that still would have been a decent report.
Finally, the latest update to the Atlanta Fed GDPnow estimate for Q3 was bumped another 2/10ths of a percentage on the strong retail sales report.
LOOKING AHEAD
Not much on the US macro calendar this week apart from Flash PMIs, but a very busy one the week after.
Elsewhere, main event risks include Bank of Canada, Canadian retail sales, Tokyo CPI, round of Flash PMIs, and many top central bankers are in the US this week speaking on monetary policy/issues.
Earnings season heads into full swing with almost a 1/4 of S&P500 companies reporting this week and over 1/3rd the following week. Plenty of big names on deck this week including Tesla and SAP.
EQUITIES
SPX is attempting to ‘out-rally’ the rising wedge structure, but not only do the bullish bars look comparatively smaller than the bearish ones, I do recall feeling that equities have been rather weak on intraday basis. This led me to look at the following chart: Columns/bars are Open-to-Close returns, Red-line is the 5-day moving average of Open-to-Close returns, and Yellow is the 5-day moving average of Close-to-Close returns.
Turns out that this chart depicts my sentiments well. The Yellow Close-to-Close average stayed positive but the Red Open-to-Close average has gone negative for both SPX and NDX. Russell2000 performance during regular trading hours has been marginally weaker also.
VIX eased off since the high at the start of the month and so has Skew in Orange. I wonder if that's a reflection of OPEX related unwinds or market participants being less longer interested in hedging downside, and more interested in positioning/hedging right tails instead — we have seen plenty of 6k SPX chatter in2025 doing the rounds over that time. Whatever the case may be, I get the sense that this pullback makes market conditions a little more double-edged than in the early half of the month.
European equities is piquing my interest after seeing the above chart of Stoxx50 EPS estimates from zerohedge. Trump is clearly not a fan of trade policies with Europe or a lack of them, and I think there is asymmetric risk here should Trump win on top of tumbling earnings expectations for Europe’s largest companies.
European equities have clearly struggled to keep up with US equities as a result of weak profit expectations. Technically, Stoxx 50 and 600 are convincingly toppy with a series of rejections at key pivots levels. Any weakness is likely to take their cue from US equities but this is making me consider trading around a Stoxx/SPX spread thematically (e.g. Stoxx for shorts, SPX for longs).
COMMODITIES
Bloomberg commodities index has consolidated nicely with the fib levels holding and looks to be starting its 5th leg higher.
It’s all about precious metals however which is the only sub-component that has outperformed the main index. No short-term view on precious metals, but I think there's a violent down-leg in there should we get a scenario where the curve re-flattens on adverse inflation prints for instance, and longer breakevens fall in response to real yields rising as a result of the Fed maintaining a more restrictive policy for longer. That scenario seems far away for now but that’s on my mind in a lot of scenarios going forward.
I’m currently only interested in Brent Crude and have bought into recent dips. RSI is already hinting an upside break and it’s quite close to printing a robust signal. Beyond the chart, headlines suggests the Middle-eastern situation has got edgier after Iran’s failed attempt on Netanyahu is likely to see Israel retaliate with more severity and to have expanded their plans beyond neutralising threats in adjacent lands.
RATES & FX
Yields have been consolidating last week (Purple to Orange, change in Red) after the big move higher. Path of least resistance is higher on a light calendar with nothing other Flash PMIs to derail the momentum.
Pricing still looks too rich for the next 2 meetings based on recent trends of reaccelerating growth and inflation and the Fed appears to be hinting such concerns.
- Waller has concerns on near-term inflation:
LATEST INFLATION DATA ‘DISAPPOINTING’
WATCHING INFLATION DATA TO SEE HOW PERSISTENT RECENT UPTICK IS; PROGRESS ON INFLATION HAS BEEN ‘ROLLERCOASTER’ - Bostic who we know only sees one more 25bps cut this year:
NEUTRAL POLICY RATE IS IN 3 TO 3.5% RANGE
NOT IN A RUSH TO GET TO NEUTRAL, WILL BE PATIENT
THE JOB ON INFLATION IS NOT DONE, NEED TO STAY VIGILANT
The natural tendency would be for the USD to drift higher, but as I can see short-term rates, of which the USD has closely tracked (chart above), stalling out in the absence of further catalysts, I think USD could be in for some chop in the week ahead all else being equal. That said, plenty of upside risks lurking from the Trump trade and further war escalations.
— — — — —
All in all, views largely unchanged but turning more cautious as we approach October month-end — 1) strong conviction on the long USD book but vulnerable to potential short-covering if labour market data proves weak which it could do due to Hurricanes and strikes; and 2) list of reasons to short SPX have been unable to impact price action and starting to look like a dubious idea the more that goes on.
That’s all for now, good luck trading!
