2024.12.16 Weekly
The lengthy post-pandemic disinflation looks to be over, along with the Biden era. As noted last week:
- Inflation is re-accelerating and price pressures broadening.
- Shelter inflation is moderating but goods inflation is back.
- Trump adds upside risks to goods inflation via tariffs, and potentially to wage inflation via deportations.
While inflation on a 3-month annualised basis bottomed in August, it isn’t a surprise that the bottom and sharp rebound in inflation expectations coincided with Trump’s Presidential odds improving from mid-September onwards.
Consensus appears to expect a hawkish cut tomorrow and rightly so. The FOMC must shift its focus back to the price-stability mandate given recent trends, and Trump’s policies likely to further complicate their longer-run inflation outlook. In fact, I don’t know how the Fed could make the case for further cuts over the medium term with reaccelerating inflation, 3.3% real GDP growth and 4.5% nominal wage growth.
Market still leans towards 3 cuts next year with the next cut (after this week’s cut) to come as early as Mar-2025, but I think 2 cuts in 2025 is a reasonable expectation as things are now — 1 in Q3, another in Q4.
And if inflation continues to rise, the Fed’s view on neutral would probably coalesce around 3% and above, from the mid- to high-2’s. That would exert more upward pressure on yields and USD while creating an increasingly challenging environment for risky assets — notice how SPX performance has tended to struggle when 2yr inflation expectations relative to the 10yr has flipped positive.
LOOKING AHEAD
It’s a busy week with a few G10 central bank meetings and speakers, as well as some top-tier data.
EQUITIES
Global equities adding to earlier hints of weakness (narrow US breadth and lacklustre performance in overseas markets). It’s a tough call on where those charts go from here but the full-bodied bearish weekly reversal suggests weakening risk sentiment for the week ahead.
Emerging markets not particularly convincing after some strong initial moves, which suggests to me that the threat of Trump tariffs as well as underwhelming China stimulus news is hampering upside.
SPX was down slightly last week while NDX recorded new ATH.
Focusing on the mega-cap stocks, charts are looking interesting to say the least. AAPL has demark indicators hinting potential exhaustion this week, MSFT retesting trendline resistance with a decent reaction seen last Thursday.
NVDA begun piercing neckline support at the ~132 handle, AVGO gone very overbought on both weekly and daily timeframes, hit the big 250 figure and approaching trendline resistance so probably worth a watch.
Big rallies in AMZN GOOGL and TSLA whose charts are less interesting than the ones above, but all have very high RSI readings and around some important figues / fibs.
A couple of weeks ago I noted that I leant toward being a contrarian to the seasonal Santa rally this year for a list of reasons far longer than I could come up with for the bull side. NYSE net advancing issues has been mostly in negative so far this month, and if 1) mega-cap stocks begin to square off recent gains, and/or 2) Fed delivers hawkish guidance, I think there is decent odds we are in the process of topping out.
I’ve got absolutely obliterated on my NDX shorts, but I am willing to give it another go heading into the Fed meeting, and giving up on it quickly this time should the technical picture not develop towards a reversal by the weekly close.
COMMODITIES
A quick look at the Bloomberg commodity index (left) shows cyclical sentiment to be weak. Particularly in industrial metals (middle).
At the beginning of the month I expected Copper to head towards the mid-4s after the trendline double bottom. It did grind higher but collapsed over the past week as market continues to be underwhelmed by China stimulus news, and threat of Trump tariffs looming.
While Industrial metals and Energy looks structurally unclear, I think precious metals looks particularly attractive this week.
US10yr real rates broke out to the upside and now 2yr real rate is looking to join the party. I see good potential for continuation given that I think Powell should stop channeling into his inner dove.
RATES
We had some UST auctions last week with mixed results:
- 3-year ($58 bn) 0.2 bp tail
- 10-year ($39 bn) 1.6 bp stop-through
- 30-year ($22 bn) 1.1 bp tail
10yr had a very strong auction but did little to stop the rebound in 10yr yields last week rising 25bps.
What is particularly of interest to me is the breakout in yields has been driven by real yields — note the breakout coinciding with a drop in the 10yr inflation premium (bottom panel), reflecting fincon tightening.
FX
I continue to maintain high conviction on my USDJPY USDCHF longs, the only good trade so far this month initiating the trades on the November NFP dip earlier this month.
While I can make a strong case for more upside as per many of my earlier observations and comments, I struggle to make to make a case for downside or even taking profit even though they are a technically important levels here.
USDJPY is at the 154 handle which was a major pivot after the October rally with a demark 9 countup on print; USDCHF returns to a major area supply. But the rollover and even stronger bounceback suggests these supply areas are likely to be weak.
Elsewhere in FX I’m lacking some clarity thematically. I also have a USDMXN short which I plan to take profit on over the next 8–12 hours. Chart still looks nice for leg lower but as my focus is firmly on the upward move in US real rates, I’m happy to take profit with some carry bonus.
Further, if the market is unfazed by a hawkish FOMC this week, or Powell turns out to be unrelentingly dovish, USDMXN will be back on my menu for a potential risk-on trade and acknowledging that I may be wrong on taking a contrarian view to this year’s Santa rally.
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That’s all for now — good luck trading!