2025.01.20 Weekly
Last week’s data may have provided some relief for risk but I’m getting the sense the market about getting over its skis on the rally, especially when I see plenty of conceited reactions as well as the odd comments on twitter that essentially reads like were you that stupid to miss that rally? Not to be emotional about the matter and I could very well be wrong on this ‘Top’ view, but I think a strong case could be made to argue against this rally. I note my reasons below and why I’ve grown some conviction after some relief and pullback across markets, however small as it may seem...
Softer data, but was it really?
USD strength and Equities/Bonds sell-off found relief from softer-than-expected inflation and retail sales reports last week, but a closer look reveals it may not be anything for markets to get too excited about.
First off from last week — PPI. Headline printed 0.2% below the 0.4% expected and Core (ex-Food/Energy) was 0% below the 0.2% expected.
The monthly decline was driven by Services components though there has been a pickup in a few components which carry larger weights in PCE.
CPI was as expected at 0.4% but Core at 0.2% was softer than the 0.3% expected. While those m/m prints may look somewhat encouraging at first, elevated Food and a big pickup in Energy prices has the 3-month annualised rate of inflation finishing the year at 3.9% from just 0.5% in June — the last 6 months signifying anything but ‘progress’.
Retail Sales report was fairly solid despite the headline and core prints missing expectations. Prior month was revised up and the Control Group put in a big beat at 0.7% versus the 0.4% expected.
NFIB small business optimism index put in 2 consecutively strong monthly beats to its highest reading since November of 2018. The surge in optimism stemming from businesses seeing stronger buiness outlook and sales. Pricing plans also rebounded in the 2nd half of 2024 which is consistent with inflation trends observed over that time.
Employment components look reasonably stable with hiring and compensation plans, as well as access to credit significantly imporving into the end of year.
Economic Optimism among consumers has gone net positive last quarter (RCM/TIPP above 50) for the time in over 3 years while indices of other consumer surveys have been steadily rebounding the past 6-months.
To sum up what we’re seeing in the macro data, services inflation continued to cool — great! but… the price changes that are really felt by consumers via food, energy and goods inflation continued to pick up. That is concerning for the broader inflation outlook as the disinflationary trend of the past 2 years was largely attributable to a cooling in those categories. And despite the softer-than-expected Retail sales prints, the last 3 to 6 months been steadily strong while the big beat in the Control Group continues to point to strong consumer-driven growth that is further underpinned by rebounding economic optimism and confidence among businesses and consumers.
A lot can change in a few months but based on those trends, I cannot see an anymore dovish scenario than the Fed ( in their December dots) seeing 2 cuts this year, which does look far for the moment. But not only are there potential inflationary impacts from Trump’s America-first/pro-growth policies, the current trajectory of economic data points to the risk that the Fed does less, not more. That is a major reason why I’m a seller of the SPX breakout (chart review next) as it nearly completes a return to pre- December FOMC levels.
Stonks getting a bit much?
If you consider yourself to be any bit of a chartist, you’ll probably have a good sense of what makes a strong trendline — for me, it should have a minimum of 3 solid touches that gets marked right to the tick, pretty much (though I’d probably add that when it comes to trading trendlines, fading the 3rd touch usually works very well). Going back to what we have now, SPX is showing such a trendline of which has broken out above to finish the week with a doejistar candle — *winks*.
Quite often we see some consolidation that peeks below the trendline (like it traps bears) before the resumption of trend on these types of breakouts. But as I tie in how I interpret the emerging macro trends and how that could evolve, I think this could very well turn out to be a ‘falsey’.
Technically, there isn’t a rush to get in should we want to see the price action evolve a little more with a key area of support only just half a percent lower, but I have my reasons for selling into this rally should it attempt to follow through on the breakout and above the 6k handle.
NDX break higher is of a different flavour. There is a long running trendline running from the November’23 and April’24 lows that has seen many pivots in the latter half of 2024, and capped the Friday breakout move. Also the trendline running through the highers from August to October has proved meaningul marking some pivots in recent months and the low on Friday. Both of those trendlines serving as the Friday hi-lo puts NDX in a straddle-like position that should offer insightful cues this week.
Earnings season beckons for US markets but I’m more focused on the developing macro narratives (strong US economy + Trump 2.0).
As for Europe, Dax ripped to new ATH’s, and Stoxx indicies have put in a strong continuation from its break higher. All I could say, or watch here, is that it could be nearing exhaustion at these levels, so something to keep an eye to see how the risk complex is holding up. Truth be told, it is rather baffling that European stocks is ripping when it faces the prospects of escalating trade tensions amidst a cyclically weak backdrop.
I mentioned last week that the Nikkei looked like it was about to give out. It isdid break lower but consolidated immediately. We don’t hear about the Nikkei like we did only a few months ago, and rightly so — the chart looks rather unexciting both ways. Wages might be growing, but that's an incremental cost increase to businesses, as is the bounce back in Energy prices and policy normalisation. Not sure what the rage is about tbh.
Heavy metal
The big story has been the big rebound in Energy prices. It’s looking a bit high at the moment but being firmly in the bullish momentum territory, I wouldn’t be surprised to see it going higher — doing CTA tings. That aside, I think metals is very attractive from this point…
Precious metals has surprised me the past few weeks given the move in yields. I’ve got short off in the 2720s on Thursday as it looked the most appealing way to get on a bullish Dollar trade at the time. I’ve survived the trailer placed at 2718 by the narrowest of margins on Friday and we’re off to a decent start. Fingers crossed.
Technically we’re pivoting away from this rising trendline that has been well fairly well observed and I’m hoping real rates and the dollar is looking up again after the brief pullback last week to help Gold lower. Silver is also very appealing and an asset that tends perform very weak in a bear flattening regime according to my simple backtests, so if we get more convincing signs of risk-off, I intend to look at increasing my precious metal short exposure via silver.
Copper also very appealing after a bearish engulfing on Friday, reversing the move above the 200dma. A reversion towards 4.2 looks in order.
USD still exceptionalistic
Monthly look at the Citi Inflation Surprise Index has the US index rising the fastest over the past 5 months or so.
The rebound in the Citi Economic Surprise Index for USD has continued for another week despite some softer than expected data. Meanwhile the EUR and GBP remain in a slump.
While USD positioning may be in the extremes and could offer some great tactical value, I find it difficult to see any tactical scenarios (other than ahead of some economic data releases) to entertain short USD trade ideas. I’d rather focus on the picture, lap up the dips by position trading to the long side than get distracted from what the major theme is, as exemplified by these charts.
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Thats all for now, good luck trading!
