2024.12.02 Weekly
December seasonals are exceptionally strong — stocks rip into year-end and USD sells-off. I cannot however, except for chasing performance and “supposedly” massive vol supply into year-end, justify reasons to support that seasonal rally and therefore a Contrarian to the year-end seasonal rally.
DATA REVIEW
Conference Board Consumer confidence hits the highest in 17 months with stronger sentiment across the board except for Income expectations.
Initial claims fell to 213k, a 30-week low and levels seen a year ago (Nov-Dec’2023 average was at ~212k).
Core PCE came in at 0.3% m/m and though as expected and round up from 0.27%, the emerging trend is concerning with Services inflation running at a 3-month annualised pace of around 3.8% from 2.73% in July.
“The economy is not sending any signals that we need to be in a hurry to lower rates.”
Since Powell made that statement on Nov-14th, recent data has shown:
- strong US composite PMI (fastest rate of expansion in 2.5yrs)
- strong consumer confidence (both CB and UoM surveys)
- low unemployment claims (virtually unchanged yr/yr)
- reaccelerating core inflation (3m ann. rate up over 1% in 3months).
Yet the market thinks the Fed will press on with the December cut which in my view, would be mispriced if this week’s jobs report is a strong one:
Short-end risks are skewed toward hawkish re-pricings, and long-end has risks of higher term premiums lurking with a run of strong data and Trump’s imminent return to the White House. In short, I am a contrarian to the historically strong year-end seasonals (of weaker USD and stronger Stocks) as I cannot justify the flow of narratives being in support of the rally.
LOOKING AHEAD
Busy week with ISMs, Labour market data and FOMC members speaking this week before the blackout; then CPI and UST auctions next week.
Elsewhere — Swiss CPI (becoming most bearish CHF vs G10), Bailey and Largarde, OPEC+ meeting mid-week, and Canadian PMI and Payrolls.
Last of the bunch to report this week with a few big names that may offer insights on consumer and service sectors.
EQUITIES
Global equities solidified a reversal as expected for last week but it’s unclear at the current juncture whether it can develop into a rally though there is certainly potential for it do so technically.
Developed markets have led last week’s rally, while Emerging markets index stooped back down to the lows.
Looking at the index that rules them all, SPX has rallied to a new record high and close but upside is beginning to look somewhat lacklustre gaining just 1% last week, compared to +1.7% the week before and the big +5% election rally at the beginning of the month.
Looking at the % of stocks above the 20dma, these are approaching extremes particularly for the S&P and Dow, extremes of which tend to coincide with local tops.
Advance Decline spread dipped last week despite new all-time-highs for SPX and it’s equal-weight index, and adding to the trend of lower peaks since the height of the August rally.
Equities fear gauge dropped off with the VIX at the 14.5 handle at the front-month spread the most inverted since September (Orange).
Market is much less over-protected on the downside with VIX and Put-premiums easing off, which is incrementally positive for those looking for a mean reversion move in equities.
Dropping down to the sector level, Consumer discretionary continues to perform strongly but there is a slightly defensive leaning coming through last week with Healthcare, Real estate, Utilities and Stapes outperforming Cyclical sectors and Tech — a reflection of broadening and/or entering the final stages of the rally, perhaps.
Communications (XLC) and Consumer-discretionary (XLY) charts are suggestive of a potential turn this week — various Weekly Demark 13 countups on XLC, potential Daily sequential 9 countups to print on Tuesday for XLC and Wednesday for XLY.
I continue to hang on to NDX shorts averaged at 20,880 and hope to continue seeing NDX closes stay below the 21k handle in the lead up to the December FOMC.
COMMODITIES
Bloomberg commodities index index slumped below the breakout level last week being dragged lower by Energy (Red) and Precious metals (Yellow).
Consistent with the BCOM index retest the trendline from which it broke out in November, Crude and Copper is testing the lows and fairly robust trendline support. No real view but purely from a technical standpoint, I think the tactical trade is up between now and the FOMC.
Still tactically bearish on Gold, and though it has been unable to pullback any further, charts are looking interesting if not promising for Gold shorts — assuming Gold consolidation is capped at 2660, and Silver double bottom limits the downside, Gold/Silver ratio which is already hinting a turn could turn lower from here.
RATES & FX
Yields were lower across the board last week, down over 20bps from the belly outwards, and finishing almost 10bps down for the month of November which appears to be the unwinding of Trump trades.
2s10s still flirting with re-inversion, which could very well come again if stagflationary concerns gains traction with near-term inflation still sticky, and potentially negative growth and tighter labour market impact from Trump’s protectionist policies.
EUR (Blue), GBP (Green) and CAD (Red) 2yr differentials have recovered slightly into month-end but the trende still remains firmly down and in favour of USD.
USD 1-month risk reversals have eased off over the past month particularly against the CNH JPY and CHF, but still remains strongly bullish vs CAD, EUR and GBP.
USDCHF EURUSD and GBPUSD is my favoured long USD expressions from hereon. While I still think the natural path of USDJPY is higher above the 150 handle, it would seem be prudent for the time being to avoid getting in the way of stronger Japanese core inflation pressures and imminent BoJ hikes, as well as Japanese authorities seemingly encouraging strong wage growth. That said, I do have hold a tentative plan into USDJPY longs around the next BoJ decision on Dec-19th.
Further to USDCHF taking over USDJPY as my preferred Dollar pair, I like chasing CHFJPY short lower at beginning of the week, and scale out post Swiss inflation, as I think x-JPY could see a rebound on a strong NFP print.
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That’s all for now. Good luck trading!
