Ewq2024.11.11 Weekly
TRUMPONOMICS
Trump is returning to the White House with an all but confirmed ‘Red wave’. There’s never a dull moment with Trump which makes for an interesting 4 years ahead, but as far as global macro goes — we should brace for a return turbulent trade tensions and uncertaintities. Here’s what we we’ve heard from Trump so far and the potential macro impact of the policies discuessed (from HSBC):
In a nut-shell, more tariffs > higher-for-longer rates > more hawkish Fed > a stronger USD that is aggravated by other central banks keeping policy tighter as to not diverge too much from the Fed, but doing so comes at a bigger cost to growth compared to the US.
S&P Global expects higher US inflation and a drag on growth and expects a largely negative impact across most Industry sectors.
Peterson Institute for International Economics (PIIE) projects Trumponomics to strongly increase inflation and decrease growth under the low scenario (deportation of 8.3mln unauthorised worked, 10% increase in tariffs on all US imports, 60% increase on China imports, erosion of Fed independence) which is, already a strongly pessimistic set of assumptions in my view and, would already be hugely stagflationary. The high scenario includes retaliation from all trading partners.
FOMC
Even after a 50bps start and a 25bps follow up, Powell proves to be continually dovish after the initial statement hinted potential of a hawkish shift omitting the reference “we have gained greater confidence in inflation moving sustainably towards the 2% target”, but this turned out to be a recognition of greater uncertainty than a shift in stance — a precursor to a shift perhaps?
There was very little reaction overall but market pricing is gradually moving towards the possibility of a pause at the next meeting and pricing in less than 50bps over the next 3 meetings in Dec Jan and Mar.
Further out, December 2025 is looking much more fairly priced than it did a month ago at 3.9% but I think the risks are towards more hawkish repricings on continually strong data and expectation of Trumponomics.
DATA REVIEW
ISM Services accelerated to 56 in October, beating the 53.8 expected, now at the high reading since November of 2022.
There was a notable pick up in hiring sentiment — % of firms expecting higher employment at the strongest since March earlier this year.
Unemployment claims was mostly in-line — Initial was 3k higher and Continuing was 41k higher from prior readings. Still very low by pre-pandemic standards (dashed lines being the 5yr pre-pandemic average).
A goldilocks UoM survey — the Expectations index drove the rebound in the headline index, similar to what we observed in the Conference Board survey; and 1-year inflation expectations fell to the lowest level in 4 years.
Looking at the S&P PMI picture after the latest Final readings — US saw a slight revision down from the initial Flash while most had seen slight upward revisions. US remains very strong, small improvements in Europe and Australia, gradual softening in UK, and big decline in Japan Services sent the composite back into contraction.
Zooming out, momentum in data surprises still favours the US while the rest are mostly in decline — Canada and the UK in particular the most negative versus their 3-year average. Europe and China seeing some improvement but I’d consider this signal value to be weak given lingering long-term growth and trade concerns with Trump coming into power.
LOOKING AHEAD
Another busy week for the US — Inflation and Retail sales in focus to weigh up the possibility of the Fed pausing at the next meeting. Outside the macro calendar, we also await to see if Republicans confirm a Red sweep with a majority in the House as well as other headlines on the incoming Trump administration. Elsewhere:
- Tue (Nov12) — UK employment
- Wed — Australian wage price index
- Thu — Australian employment
- Fri — China industrial production and Retail sales, UK GDP
- Tue (Nov19) — Canada CPI
- Wed — UK CPI
- Fri — UK Retail sales, Flash PMIs
Coming to the end of earnings seasons with a few big names still to report, followed by NVDA on the Wednesday of the following week (Nov-20).
TRADING VIEWS
Reevaluating the tactical short risk trade:
I still maintain a sell risk view which has been around “higherer-for -longerer” that is accompanied by a “hawkish shift” from the Fed that is in response to the stronger economic data. This has proved incorrect however and leaving me to consider cutting/reducing NDX shorts currently averaged around 20880 which is beyond my initial risk limit at 21k.
With Trump’s Red Wave however, I think there is an added dimension to that central view of a stronger rates outlook that is likely to compress multiples than expand further which is — increased “stagflationary risks” as summarised under Trumpnomics above.
There is also another angle to the tactically bearish view on the “reemergence of profit pressures” coming from Prometheus Macro who notes on a twitter spaces that completely aside politics — which he admittedly ignores as it is difficult to model, that some of their systematic macro strategies have seen a significant change in turning short equities. In essence:
- top lines slowing but costs are not slowing as much = profit pressures
- certain drivers of earnings have begun to wane but expectations haven’t
- earnings expectations are high relative to those profit pressures
Reevaluating the pro USD trade:
I continue to keep my long USD runners initiated over a month ago (with the exception of NZDUSD which I squared out of completely at the end of last month) that was centered around diverging fundamentals and a market that was overly dovish on US rate cut expectations. While I think current expectations is priced fairer, upside risks still remain with Trumponomics coming into the fold.
If it is assumed that Trumponomics results in an incrementally more hawkish Fed, then it is likely that other Central banks will be incrementally more hawkish too as to not dislocate/diverge too far from Fed policies. But the kicker is that while the US economy might be able to weather a more hawkish Central bank, other economies will struggle whose yield curves will likely flattern more aggressively, and their currencies discounted on on worsening growth expectations relative to the US.
More risks to the already diverging fundamentals — no reason to give up on the long USD trade and maybe not even for a few years…
EQUITIES
SPX with a huge bounce back on Trump’s election win and a dovish Powell to help it along further. There are some technical indicators of interest here — the 161.8 fib extension of the July-August pullback at 6010, and multiple Demark variants printing potential exhaustion signals on multiple timeframes.
We’ve had some exceptionally big moves. Looking at the Weekly change (Left), last week was a nearly a 2 (156wk or 3yr) standard deviation move. For the Daily (Right) — Wednesday’s +2.53% post-election rally exceeded 3 (252day) standard deviations.
With so much positivity in the price driven by the election result where it appears the possibility of a Red wave may have been underappreciated by the market, I’m inclined to think a further rally becomes difficult. Tax cuts are great, but tariffs are not, and I think it will be the latter on which the market shifts its focus on to assess future profitability under staglfationary macro conditions.
COMMODITIES
Bloomberg commodities index continues to be in a state of consolidation and around the 38.2 fib of 2024 range, and the 50fib of the August to October rally.
Technically one could argue that it is in a state of accumulation for a potential breakout, but the fact that it continues to sit heavy on the month-long support implies the path of least resistance is for now, down. This would tally up with some running macro narratives:
- Industrial metals being mostly sideways on the positivity around a China rebound being counteracted by prospects of Trump tariffs;
- Precious metals continuing to pullback on continued USD strength and easing geopolitical tensions; and
- Energy with a sideways to mildly bearish bias on the above points.
Gold has given the doji top accompanied by Demark exhaustion counts a strong confirmation candle — a clear sell on rallies. Brent Crude keeps being drawn to this support area where I think fading any deviations from this area and trading the ranges is an acceptable strategy going forward, while keeping a mostly negative bias on the above points and its tendency to be seasonally weak during Q4.
RATES & FX
Bond yields interestingly finished lower last week after +10–15bps moves higher. Presumably, this is the unwinding of Trump trades as economic data was reasonably good. We also saw front-end yields marginally higher, and a flatter curve.
The 2s10s is nearing reinversion again and I think there is a possibility it could invert based on some abovementioned thoughts (e.g. potentially peak dovish Powell and peak Trump euphoria turning to stagflationary risks) that could give the front end a lift relative to an increasing sluggish longer-end.
In relative value terms, we could see USD strength persist if the front-end is getting another lift. Yield curves of other major economies is likely to flatten more as the cost of higher inflation and stickier policy rates will weigh on growth comparatively more than the US.
Chart is the 2yr interest rate swap spread for EURUSD (top), GBPUSD and CADUSD (bottom) which are widening even further in USD’s favour.
This chart was from last Thursday close — it plots all the daily closes of EURUSD vs the 2 year swap spread going back to the beginning of 2022 which avoids the 2021 outliers when EUR was on a rocket to the 1.2 levels. Currently trades 1.0650 as I write, but the spread is also about 10bps lower as well which would place the regression implied level for EURUSD below the 1.05 handle — a level I expected to be reached on a Trump Red sweep.
FX 1month risk reversals are still in support of USD, although it has eased slightly over the last week. Downward sloping trends in JPY and CHF riskies reflect the strongly bearish biases. I do wonder if we see skew flip which is historically very very rare (bottom 2 horiztonal panels). Price action on USDJPY last week has thrown me off on elections related unwinds but I continue to expect USDJPY to trade north of 155 and possibly to 160, and USDCHF towards 0.95.
“Buy USD! If it moves lower, buy more! — wash rinse repeat…”
… I keep saying somewhat jokingly to my peers and in all seriousness, I don’t see why that can’t continue to work.
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Have a great week trading!
