2024.10.28 Weekly
From Recession to Expansion
First let’s review how we got to where are now. For most of the 3rd quarter there was a lot of skepticism about the US growth outlook with the slowdown in the labour market and concerns the Fed was falling too far behind the curve. Macro doomer were in full voice, and the Sahm rule was getting way too many mentions.
The simple reality was that economic indicators were reflecting normalisation, and nothing more. But even so, there was a lot of anxiety in August as those concerns persisted as we saw big downward revisions to Job numbers (nearly 30% less than initially reported) fanning fears that the labour market was cooling too much and inflation continuing to ease. That was a huge fade and a big opportunity to go max long Equities.
Not only did data continually surprise to the upside, with wage growth reaccelerating to at 4.3% (3-month ann.) and lastest monthly supercore CPI was 0.45% (annualises to over 5%), Powell still went ahead with a 50bps cut! It’s no surprise that US yields went on a massive 65bps rebound from 3.6% to 4.25% as well as stocks grinding higher to new all-time-highs.
While other major economies showed a more sluggish growth outlook, USD rate differentials widened, and USD Strength followed.
This brings us up to the current date where I am reassessing risks to my core long USD book, and my broader views in general.
Tightening regime
As I’ve laid out in my twitter/x-post, I’ve observed that reaccelerating growth and inflation is what drove yields higher and that we are beginning to see the tightening factor as real yields takes the reins. And I think that makes sense as the market anticipates that the stronger growth and inflation outlook should amount to a tightening response from the Fed (via pauses and QT/taper). This chart summaries how we got here:
Going clockwise from the Sahm rule growth scare (bottom-left), Powell’s 50bps cut, and stronger economic data throughout (top-right), we’ve now ended up in a situation where breakeven inflation is beginning to move negatively against rising yields. I’ve said in a few notes that I’m not convinced we are out of the ‘good news is bad news’ regime yet, and it looks like we’ve come right back. In otherwords, rising yields has become less about future growth and inflation are more about tightening and this is typically a challenging regime for risky assets.
Not only would we anticipate the Fed to turn relative more hawkish than other central banks and see extended USD strength, we would also anticipate increased volatility in rate-sensitive and higher-beta assets includings stocks, precious metals, and emfx. Not to downplay the importance of US elections, but I’ve ignored politics for the purpose of this exercise as I think the backdrop of strong growth and inflation is what the Fed is faced with regardless of the outcome, thus being important macro undercurrents to bear in mind in the months ahead.
Data review
new high in continuing claims, 62k shy of the pre-pandemic 5yr average
“October saw business activity continue to grow at an encouragingly solid pace, sustaining the economic upturn that has been recorded in the year to date into the fourth quarter. The October flash PMI is consistent with GDP growing at an annualized rate of around 2.5%.
“Demand has also strengthened, as signalled by new order inflows hitting the highest for nearly one-and-a-half years, albeit with both output and sales growth limited to the services economy.
“Sales are being stimulated in part by more competitive pricing, which has in turn helped drive selling price inflation for goods and services down to the lowest since the initial pandemic slump in early 2020. These weaker price pressures are consistent with inflation running below the Fed’s 2% target.
“Businesses nevertheless remain cautious about hiring, leading to a third month of modest payroll reductions. Firms are worried in particular about uncertainty caused by the Presidential Election.
“More encouragingly, confidence in the longer, year-ahead, outlook has improved as companies hope that a stabler post-election environment is more conducive to growth. This is especially so in the manufacturing sector, where factories hope that the current soft patch in production and sales will reverse as the uncertainty caused by the political environment passes.”
EQUITIES
Last weekend I noted my observation that the action during regular US trading hours had felt rather weak, despite being up on that week. I posted a similar chart to the above to show that intraday weakness was noting the 5-day average of daily returns had turned negative on Open-to-Close basis. This past week, we got a bit of follow through to print a down week for the SPX, the first in 7 weeks.
The general flavour of the charts points to a correction with the SPX having the makings of a 3 to 5% pullback. It’s rolled off from the upper-side of the rising wedge structure with RSI hinting a break lower that would take it back for a retest of the ~5625 levels (thick White trendline and Green horizontal lines).
Nasdaq and Russell2k also setting up for a ~5% pullback — NDX outperformed but the rally was completed undone by the fib and upper trendline; and RUT rejections above the upper trendline has left price action congestedly heavy with a double-top like structure.
Technicals aside however, it’s a jam-packed calendar ahead from UST refunding announcement, mega-Tech earnings, and hugely important NFP and PCE reports. While sentiment exhibited by the high put skew (3-times more Puts than Calls) is very bearish, market being overly protected likely continues to limit downside — a pattern we’ve seen so far this month.
Looking elsewhere, global equities complex is leaning heavy on support: ACWX all countries ex-US index is leaning very heavy on support, EFA developed markets index also with a demark 9 countdown, EMXC emerging ex-China also on key support.
Europe is still the more appealing short of the major equity indices.
China rally still in good shape…
and so are other major Asian indices apart from Taiwan’s TAIEX chart looking vulnerable as well as looking a lot like NDX (Orange).
COMMODITIES
Overall structure in the Bloomberg commodities index still looks constructive to me but the near-term looks very unclear chart-wise as well as US elections outcome could easily swing this to the next lower support.
The broad index saw a gap lower to start the week driven by a collapse in Energy (Red) after Israel conducted airstrikes on specific targets in Iran and the latter saying very little in the aftermath. Precious metals (Yellow) still continues to outperform the broad index, and Industrial metals (Orange) trading sideways for most of this month.
Brent crude has finally hit trendline support which I’ve been doubtful about reaching in recent weeks. There could be a tradeable bottom here for the week in the tactical sense from chart perspective and probably just a China or Iran headline away from squeezing back higher. I’ve got horrendously flushed on my long runner on this weekend gap and have taken another tactical long for just this week; little clarity beyond that however with both presidential candidates very motivated to keep Oil prices down.
Meanwhile, NatGas has ripped right off the bat last week after going long and was unaffected by the weekend news. I will begin to scale out this week as it has reached my target 2.50/60 area and leave a runner to see if a tightening in European gas market heading into the winter months plays out.
Gold and Silver printed weekly demark 13 countup last week, and given the current narrative is that we may have seen peak in Israel/Iran escalations, as well as rising yields — I’m rather liking short ideas this week. I’m already short Silver from around 34.25 and added Gold to the mix today at 2734.
Lastly, a brief look at Doctor Copper which has gone sideways since the sell-off in the early half of October, but momentum is turning up and price action is on the verge of a breakout (though not a robust technical setup). Copper/Gold offers an interesting perspective, particularly for precious metal shorts, with War-tensions is simmering down and the US10yr yield massively diverging against the ratio going to new lows.
RATES & FX
US10yr yield chart has made an upside break and looks to be eye the 4.5% area. A lot should depend on this week’s NFP PCE data and US elections next week, but I think the current trajectory of risks points to 4–5% over the longer-term — as covered earlier.
For FX, the only new positions added to my heavily core long USD book (EURUSD GBPUSD shorts, USDCHF USDJPY longs that has been running for about a month): GBPCAD short 1.7965 average (stop 1.8030) from post-BoC 50bps cut at which looks very likely to be hit; and USDJPY long at 151.70 (stop 150.70) which got to within ~10pips of the 154 handle this morning.
GBPCAD in I should have given up on sooner in hindsight with the BoC still committing to a very dovish guidance and keeping the door open to another 50bps cut; whereas USDJPY arguments have been further strengthened by a more uncertain Japan political outlook as Ishiba’s party has lost majority for the first time since 2009 as well as US yields continuing to rip higher.
Looking at momentum exhibited by G8 index charts:
- EUR looks appealing on the crosses against AUD and NZD which would fit the narrative of war de-escalations and softening broad risk appetite; GBP also looks equally appealing but I would look to be pounce the other way ahead of the November BoE who I think will show an increasingly strong easing bias which I’m expressing by EURGBP longs from around 0.83 handle.
- CHF never ceases to confuse me, whereas JPY has little reasons to support a change in trend — USDJPY long should remain a heavily favoured theme over the medium term in my view until US economic data brings back fresh slowdown concerns.
- Commodity dollars is looking rather uninspired with NZD looking the weakest, followed by AUD and CAD.
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Going to be an insane couple of weeks, safe trading out there!
