2024.12.23 Weekly

Have yourself a hawkish little xmas

DoejiStar
8 min readDec 23, 2024

DATA REVIEW

Retail sales came in at +0.7% m/m, above +0.6% expected and on top of an upwardly revised October print from +0.4% to +0.5%. Another solid report reinforcing the strengthening trend seen through 2024.

University of Michigan consumer sentiment continues to improve with consumers turning very upbeat about current conditions.

PCE came in softer than expected across the board, increasing just +0.1% for both headline and core measures in November.

Personal income and expenditures came in below expectations, but do want to flag the pick-up in Goods inflation with concerns about goods-disinflation being behind us.

NY Fed Estimates for the Average Unemployment Rate in Four Quarters’ Time

The NY Fed now sees downside risks to the labor market being lower than the historical average, predicting the probability of Unemployment going above 5% by the end of 2025 at around 8%.

FOMC

A very hawkish 25bps cut!

  • Dots revealed the Fed now sees just 2 cuts from 4 cuts in 2025, and higher neutral via a shift in the Longer-run rate to 3% from 2.875%.
  • Core inflation forecasts were revised higher through 2026,
  • Unemployment was revised lower for 2024 and 2025, and
  • GDP growth was revised higher for 2024 and 2025.
  • Cleveland Fed’s Hammack ‘formally’ dissented preferring to hold, while 3 committee members were penciled in for 4.625% for the end of 2024. GS interprets them to be ‘soft dissents’ against cutting last week.

While the outcome may have largely met market expectations, the SEP reflects a strongly hawkish shift in the minds of committee members. That, in my view, effectively signals that the Fed will be on pause through Q1.

As it stands, market still leans towards 2 cuts in 2025 as with the consensus view from the banks also at 2 with the first cut to come as early as March. Many of those calls come with the view on inflation continuing to ease and the labour market continuing to soften — both of which would seem like rather presumptuous takes given how the data has shaped up this past quarter. I’ve mentioned on many occasions that I remain unconvinced we are out of the good news is bad news regime, and perhaps even more so now:

  • economic data (though moderating) still pointing to US growth continuing to run at a strong pace,
  • lower risks of rising Unemployment next year according to the NY Fed noted earlier,
  • USD already quite strong, US10yr yields looking higher beyond the 4.5% handle, and
  • the Fed now swinging in a hawkish direction.

So unless risks of higher unemployment resurfaces, I see risks of cuts being pushed further out and for markets — stronger data at this juncture would in my view prove more disruptive under those conditions.

Lastly, to comment on a chart that has been doing the rounds — cash allocations have gone below the prior extreme around the beginning of 2024. What’s interesting is that we saw a brief recovery as concerns about the labour market grew, then peaked as the Fed signaled that the labour-market put is in full effect. Now that we are at new record lows with the Fed pivoting away from a dovish stance, I think this could be a good indication of where we are in the risk cycle. Perhaps.

LOOKING AHEAD

A light calendar through the festive season — Consumer confidence and UST auctions the main focus for the week.

EQUITIES

SPX momentum shifted to the downside with a breakdown after a demark weekly 13 countup marked the top during the first week of December. I’ve had this trendline running from the Mar-Aug’2023 lows on the Daily chart that has been an excellent reference point through 2024. We have closed below that trendline on Friday even with the OPEX recovery. I do like a good narrative to go with my technical views, and think we have one now after the Fed’s hawkish shift. That could take us down to the mid-5600s which was 1) the breakout level fueled by Powell’s 50bps cut, and 2) the eventual base from which the market rallied on Trump odds improving.

NDX printed a bearish engulfing and 13 countup last week with a bearish RSI break suggesting the trend has turned. Based on the trendline running through the Aug-Sep highs that has been the point of many pivots over Q4, 21,100 is the level to watch here a close below would give me greater increased conviction that equities are reverting back to the October lows.

VIX may have seen some unwinding into the December OPEX but SDEX (a cleaner measure of how concerned the market is about the downside) suggests the market remains somewhat fearful of the downside as we approach year-end.

DAX still doesn’t look like it belongs up here and, again, think the Q4 rally unwinds here too and I’d be eyeing those Q4 lows for the first port of call.

No view on the NIKKEI but I do think it’s interesting to note that it’s done absolutely nothing over the last few months while it’s been the darling long equities trade in global macro. And with some good reasons in fairness (as I’ll mention under USDJPY below) so could be worth looking at dips should it break range to the downside.

COMMODITIES

Bloomberg commodities index has rebounded from a major support area and while I like it to continue higher, I don’t really have much of a view on the sub-classes.

Industrial metals (left) reacting off a major support area but with the world being in some sort of industrial/manufacturing recession, I’m not excited about the upside despite some decent levels.
Precious metals (mid) has carved out a major topping structure and beginning to buckle. I think it’s a sell on rallies while I see upside risks to US real yields and dollar linger well into 2025.
Energy (right) is looking increasingly constructive but I’m not sure I see a breakout on the cards just yet with supply said to be tight into next year. Should it continue higher for whatever reason however, that would be supportive of my views.

RATES

Massive change in the yield curve since the September FOMC. Yields were up more than 10bps from the belly outwards last week.

I’ve talked about real yields becoming a dominant factor as a result of some tightening response to the run of strong data in recent months. Last week has begun to show real yields has taken the reins in driving yields higher diverging against the slump in breakeven since December 13th.

The Red dot is the MTD-change and the preceding two lighter-Red dots being the monthly change for November and October. While I don’t see an obvious path into the lower quadrants, I think the near-term risk is for real yields to creep higher to reflect tightening as a result of the Fed’s holding pattern through Q1 of 2025.

FX

As a major USD bull since late September, I’m constantly debating whether to close out on the entirety of my positions which is a collection of small runners stacked up from scaled out positions. Moves are stretched and positioning is crowded on the one hand, but I struggle to make a case for it on the other.

The natural path for USDJPY still seems higher despite a strong technical reaction from this major pivot level seen earlier in the year. The BoJ will take their sweet time with Japanese authorities having never been this excited to see some nominal growth and inflation, and they have effectively communicated that they have no desire to stifle that progress (after decades of deflation and ineffective QE). Hikes are adequately loaded, and on the US side, yields probably won’t go much lower in the absence of weaker US data, so until we hit extreme intervention risk, I still like this on dips for a trip back above the 160 handle.

USDCHF I feel more confident about holding as the risks for the SNB to head back towards zero continue to mount. The Swiss have had by far the lowest inflation in G10 in the post-pandemic period and is getting weaker. If there are any tactical reasons to be long other major currencies, there isn’t a better funder that the CHF for the forseeable future.

This chart from RBC says it all…

Like USDJPY, EURUSD chart is also screaming at me to take profit after making a double bottom at the major 1.0350 pivot. Europe’s major economies are stagnating with Services sectors now rolling over. Perhaps it could see some meaningful relief down the road after Trump gets his way with Europe, but that still seems far away from now.

Cable is facing an even worse economic outlook than Europe in my view. Europe do have other economies that could help to offset the stagnation in Germany and France, but the UK is on it’s own and looking down the stagflation barrel heading into 2025.

All in all, while the USD could very well be on a pullback for the coming weeks, I’ve very little interest in betting on the JPY CHF EUR or GBP, while narratives behind the commodity dollars AUD NZD and CAD isn’t any more appetising either. Happy to stay long USD for now and scale back into some dips.

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That’s all for now, and merry x’mas!

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DoejiStar
DoejiStar

Written by DoejiStar

Weekly Macro Trading Journal

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