2025.01.27 Weekly
Data review
First off, flash PMIs…
US January Composite PMI dropped 3 points driven by a larger than expected drop in Services (52.4 vs 56.4 expected), but still firmly in expansion. Europe improved but nothing to get excited about while Japan has seen a pick-up.
Services sector in Germany and Italy rebounded into positive territory as businesses have become more optimistic about the future despite all the surveys flagging fresh cost pressures.
Manufacturing in Europe improved but deteriorated further for the 2 largest European economies while UK and Australia also deteriorated. US is the only one of this reviewd sample that is marginally in expansion.
Report highlights:
- US: moderating from December’s 32-month high to signal a more modest pace of expansion; inflationary pressures intensified to a four-month high — acceleration in input costs and selling prices was broad-based across goods and services; Employment rose at the fastest rate for two and-a-half years after four months of job shedding — surge in service sector hiring where jobs were added at the sharpest rate for 30 months; poor staff availability; “combination of robust economic growth, a strong job market, and higher inflation could encourage a more hawkish policy approach from the Fed”.
- Eurozone: services activity increased for a 2nd month while manufacturing production continued to fall, sharp and accelerated increase in input costs for a 4th month running and steepest since April 2023, and output price inflation also accelerated. “Ahead of the ECB meeting next week, news on the price front is not encouraging. Cost inflation increased in the services sector which ECB president Lagarde has said to monitor closely. Worryingly, input prices in manufacturing have increased ending four months of stable or decreasing costs. Wages rose in the eurozone at the highest rate since the euro’s inception during the third quarter of 2024 according to Eurostat. However, given the weak state of the economy, the ECB will likely stick to its gradual pace of cutting interest rates, for the time being”.
- UK: marginally expanded in January largely due sustained modest growth in services offsetting lower manufacturing production; new business fell at the fastest pace since October 2023, employment levels decreased for the 4th month running; rate of inflation was the steepest for just over one-and-a-half years — input prices accelerated to its strongest since May 2023 while average prices charged increased at the fastest pace for 18 months in January; business optimism lowest since December 2022 driven by falling confidence across the service economy. “While the stalled economy and deteriorating jobs market suggest there’s an increased need for rate cuts to stimulate growth, the rise in price pressures hints that the inflation genie is by no means back in its bottle”.
- Japan: Strongest rise in activity for 4 months led by Services; strongest rate of job creation for 6 months; average input cost rises at the strongest rate since August.
- Australia: activity supported by higher new business although export orders continued to fall; lack of capacity pressure led to employment falling for a second successive month; input price inflation climbed to the highest since September 2024 and output charges rose at the fastest pace in six months.
PMI reports have all shared a common theme — inflation pressures are back, it’s broad based, and that could upset the central banking apple cart that has shifted firmly into an ‘interest-rate-cutting / policy-normalisation’ bias over the last 6 to 9 months or so. The Citi Inflation Surprise Index (derived from CPI PPI and Wage data) has picked up again to start the year after going marginally positive and slowing down into year-end, and assuming that the aforementioned ‘bias’ has been a major factor in supporting a fairly bullish 2024, a continual pick-up in inflation pressures is likely to act in the reverse particularly with global equities around all-time-highs.
UoM Final number revealed sentiment was weaker than initially estimated with sharply rising inflation expectations — downward revisions across the board (Sentiment -2.1pts, Current conditions -3.9, Expectations -0.9) while 1-yr inflation expectations remained unchanged at 3.3% and the 5-yr nudged down by -0.1%.
Claims bounced sharply higher probably owing to adverse weather and rampant wildfires in the most populous US state of California. Initial claims still at historically low levels and Continuing claims, though back to recent peaks, is still short of the 5 year pre-pandemic average.
Busy week ahead
Plenty on the calendar this week but probably nothing that is expected to surprise markets — FOMC is in ‘wait-and-see’ mode and insights from PPI and CPI reports unlikely to make PCE a surprise.
Perhaps earnings could be more insightful on how the economy is evolving particularly with respect to prices paid and charged by companies is discussed and raised as a concern just as the PMI reports have flagged last week. Lots of big names on deck as earnings season gets into full swing.
Is this the top?
SPX put in a record high and close last week. A remarkable 6% rally that saw stochs go from near oversold to extreme overbought in just 8 sessions. The Yellow trendline running from the Mar’2023 and week of March and August 2023 lows has been a decent guide seeing numerous pivots of which last week’s bar high had wicked off along with the upper White trendline. Top could be in looking at the morning trade but should we continue higher, the Daily breakout would be in play above the 6k handle targeting 6200 and possible demark sequential 9 countup to print on Tuesday.
OEX (S&P100 large-caps index) also showing a similar trendline reversal and potential for a sequential 9 countup on Tuesday.
Looking at breadth measures for those indicies — percentage of OEX and SPX stocks above the 5-moving average put in a lower peak (diverging against the higher-highs in the index) and while the 20-day is in the extremes, this is suggestive of consolidation.
The sharp pullback since the Tuesday peak in the 5-day and 1-month net highs has diverged against the move to ATH’s and also suggestive of consolidation if not a near-term top.
While volatility measures such as the VIX, Skewdex and implied correlation are at very low levels and hardly signaling anything, SPX futures are trading very heavily this morning breaking its uptrend structure, with stochastic making a bearing cross — so we may see vol expand from here as a result of this breakdown.
Last week I posted the above chart labelling some ranges where I would expect to see some resistance and though my conviction did begin to wane as we continued to press higher up until the end of the week, it certainly looks to be taking shape this morning.
Commodities
I posted my concerns of the recent commodities rally adding to some reemerging inflation pressures — particularly in goods, foods and energy. The rally has stalled last week and looks to be on the turn as we start the new week.
Ags and energy is rolling over but its not quite clear to me that it is doing anything more than a short descent to retest breakout levels.
Precious metals has been a reversal bar at prior resistance levels and 3rd touch of the upper trendline, and is followed up by a break lower. Though it’s been well supported at these levels of late, upside hasn’t been tremendously explosive and looks like it has room to pullback.
I’ve attempted another short at 2784 seeing some nice hourly action against the October high late on Friday and a sequential 9 countup to be printed. I’m encouraged by the stochastic cross below the signal line, and a a close below 2750 would give me further confidence that some downside traction is building for the week ahead.
Rates
US yields was little changed last week as the mildly bullish bond buying bias continued on softer data. I think these moves is just some residual unwind of the hawkish right tail from pricing in odds of a hike at the turn of the year, as well as in the Trump trade on longer maturities.
10 year yields does looks like it wants lower but with US fundamentals remaining robust despite some softer than expected data, and unless NFP comes in weak next week, I think downside will be shallow with 4.5% area in the 10yr (top) 2.1% in 10yr TIPS (bottom) to be supported.
FX
I haven’t been doing too much other than some intraday in FX, partly because I still hang onto my positive USD view and awaiting some good levels to enter fresh longs against the usual EUR GBP CHF and JPY. For the moment however, I’m low on conviction on USD longs for a bigger trade view/idea as US yields are in need of a boost from something — possibly from 1) Powell this week or 2) NFP next Friday. I’ll be testing the waters around those events to see if anything sticks — will Powell start to shift away from his stubbornly dovish Jackson Hole stance? and with NFP reinforce the outlook of low employment and strong wages? Will need a yes to those to stick with the longs.
With the week starting with a risk off flavour, I’m leaning towards the classic risk off pairs in JPY and CHF to go against short AUD and CAD.
AUD breaking down with Stochs developing a bearish cross from overbought, CAD already very bearish technically but Energy and other commodities (with bearish charts as reviewed earlier) dragging down their respective Terms of Trade (below) should help both AUD and CAD lower.
CHF and JPY index both eyeing up a break higher with stochastic starting to look very enticing. The pain trade would probably be CHF long according to the Citi FX Pain index (below) — essentially a market positioning index.
Thus for the near-term, I favour AUDCHF and CAD short while risk sentiment is week, while I have my sights on USD dips for the longer run trades.
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