2024.12.12 Weekly

Better late than never

Late one — I’ve not had a computer to work on with both my workstation and backup computers not booting up. I’ve also not missed a single week in nearly 4 years I’ve been doing this as part of my weekly process, so better late then never! Keeping this one short as it’s nearly the weekend.

NOVEMBER CPI

Core inflation was 0.31% m/m (3.3% y/y) vs expectations of around 0.27%.

That puts the 3-month annualised rate of Core inflation at 3.71% and proving much stickier than it looked during the Summer.

3-month annualised Core services eased slightly from 4.5% to 4.3% driven by easing shelter inflation (0.23% m/m vs 0.40% last month on OER; 0.21% on Primary rents vs 0.30%).

While sticky inflation has been centered around Core services, the sharp acceleration in core goods inflation is complicating the disinflation narrative. The latest print was driven by a big jump in used-car prices to which Michael Ashton says “the lengthy mean reversion of used car inflation is over”.

This chart summarises the current inflation dynamic well and suggests to me that inflation pressures are rotating from various categories to another taking support from the strong pace of Wages and GDP growth.

Inflation is not only accelerating higher, but also become more widespread with a clear majority of the CPI basket into positive territory (above 0% on 3-month annualised basis). Credit to my buddy Stefan for these neat charts (the ones with months labelled in Swedish).

Viraj Patel: “The Waller Rule — which looks at how many CPI basket components are running >2.5% annualised inflation — shot up in Nov. The breadth of inflation was high esp for a Nov. Worryingly, 6M trend ticking up into a seasonally hot period for inflation (Q1). Will get Fed thinking”

Another perspective of the prior chart showing the sharp broadening in inflation pressures in terms of the Waller rule.

Brent Donnelly: “Headline, Core, Wages, Supercore, and inflation expectations all suggest that inflation has bottomed here — way above 2%. Core CPI is 3.3% and rising. Supercore and Average Hourly Earnings are above 4%. This is not mission accomplished, at all. This is pretty much the definition of sticky inflation. CME FedWatch has a 0% probability of Fed Funds unchanged in 2025. That seems low.”

As has been the flavour of many weekly notes lately, I couldn’t agree more with BD’s comments with the market leaning towards 3 cuts next year. On top of real GDP running at 3.3%, Wage growth at 4.5%, and inflation pressures broadening, I don’t see how the Fed could make the case to press on with policy normalisation. Even so, another 25bps cut is fully expected next week taking the effective fed funds rate to about 4.3%; after that, I think the Fed is likely to be on pause for a good few meetings while they reassess recent inflation trends as well the impact of Trump’s policies on their longer-run inflation outlook.

STOCKS

Global equities is showing hints of consolidating after the one-month rally.

SPX is holding up while its equal-weight index (Red) over the last 2 weeks, suggesting narrowing participation in the rally.

NDX put in a +1.83% rally after the CPI report to a new record high, but again, participation has been narrowing so for this month with the equal weight index lower. Looking at charts of the largest market-cap stocks:

AAPL bearish reversal bar off the 250 handle; NVDA consolidating beneath the trendline from the Jan/Apr lows; AMZN and MSFT looking strong but turning slightly sluggish.

GOOGL and TSLA have been on absolute fire with a strong close above prior ATH; META and AVGO looking quite strong also.

I’m very close to capitulating on my NDX shorts (average ~21110) which would come as a real shame should I do so at the end of what has been an exceptional year nailing every turn, but I can’t shake the sense that we are overextended here. Will be observing those mega-cap names closely for the remainder of the week.

FX

Staying bullish USD versus low yielders CHF and JPY and see no reason to change view — SNB cut 50bps today and will probably be close to 0% by the end of 2025, BoJ and Japanese authorities are loving inflationary pressures and upward adjustment to wages that I think will keep them more accommodative than many are calling for; meanwhile the Fed could be holding policy steady over the next 6-months or, until it becomes apparent that inflation is back on track towards 2–2.5% which looks highly unlikely over the medium term.

Bearish EUR (left) and could see myself being a seller of every rally well into 2025. Europe’s industrial engine is falling apart and is likely to be under further pressure after Trump is sworn in. Mildly bearish on GBP (right) due to economic momentum rolling over the latter half of 2024 while it is unclear where a growth revival could come from going forward.

AUD (left) and in particular NZD (middle) looks appealing for a tradeable bottom — that said, my conviction for a risk-on theme (higher AUD and NZD) is low given equity risk sentiment being frothy against complications of reaccelerating inflation and a shift of focus to the potential negatives of Trump’s policies, and Commodities (below) looking rather unconvincing. CAD (right) I expect to stay weak given the fast pace of BoC rate cuts amid ailing fundamentals.

From L-to-R: BBG Commodities Index, Industrial metals sub-index, Energy sub-index

That’s all for now, good luck trading!

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