2025.02.17 Weekly
Vol crushed
I wrote about an elevated vol regime in my prior note, but got the exact opposite last week as volatility was crushed on softer than expected economic data, and decreasing geopolitical risks. Looking ahead, inflation driven by volatile food, energy and goods sectors remains a key concern and what still appears to be a very underappreciated risk going forward, but for now, I’m mildly positive on risk for this week, negative on Dollar and Gold.
Data review
CPI report came in hot at 0.4% vs 0.3% expected on headline, 0.5% vs 0.3% expected on core. This takes the 3-month annualised rate of CPI to the fastest pace since November-2022 at 4.54%, and 3.85% for core.
A look at the components that are most concerning for the overall inflation outlook — Food inflation is running at 4%, Energy at 15%, Non-durable goods at 7% and Airline fares at 18%, all on 3–month annualised basis.
Next was PPI at 0.4% above the 0.3% expected for headline while core was at 0.28%. That puts longer run rates accelerating further, with the ex-Food and Energy turning higher in January.
Market looked past the main prints however, focusing on categories that go into the Fed’s preferred PCE measure. While January report does reinforce the recent trend of easing services inflation easing, these can be quite volatile with the longer run 6-month rate still elevated for transporation and healthcare.
Looking at the specific categories that going into PCE, a rough equal weighting basis — they were net negative in January.
For many weeks, I noted that the major risk to inflation is not the usual (core and services) components the market has been focused on for the last couple of years. It’s the more volatile items like Food Energy and Goods that have been the biggest driver of inflation during 2020-22 inflationary and 2022-24 disinflationary periods — all of which are running at concerningly high rates.
Retail sales missed expectations to by some margin. Headline was -0.9% vs -0.2% expected, and -0.4% vs 0.3% for core, with a +0.3% upward prior month revision for both headline and core. That may suppress the downside surprise, but the very weak Control group reading does highlight the weakness of the report which printed -0.8% vs expectations of 0.3% along with a smaller upward revision of +0.1% to the prior month.
Looking ahead
Fed speeches, FOMC minutes and S&P Flash PMI the highlights this week.
Busier calendar in G10
SPX
With just over 75% of SPX having reported their Q4 results, it’s been a good season so far with higher percentage of companies beating Revenue expectations, and less misses on both Profit and Revenue fronts.
Consumer discretionary and Financials were strongest relative to expectations, while strong growth in Communication services, steady in IT, and a pickup in lagging sectors saw S&P500 earnings growth pick up to 15.3% for Q4 — the highest since Q4 of 2021!
After an impressive finish to the year and given more companies are giving negative guidance for Q1, it begs to question if the S&P500 can sustain the momentum to reach some very optimistic targets.
Take for example Tom Lee’s forecast (from mid-December) of 7k by mid-year and 6.6k by the end of the year. Considering that the 12-month forward P/E is at 22.2 and 2025 EPS is currently expected to be 271.45, that would place the SPX at 6,026 based on those expectations and at 6,790 assuming the same multiple with the 2026 EPS estimate of 308.61 — Tom Lee’s forecast may be that much of a stretch as it might look initially.
I do however struggle to see a continued 15% rally into mid-year:
- First, it is quite possible we may have seen the peak in earnings growth for a good while and expectations have already begun weakening so far this year — according to FactSet, earnings growth for 2025 dropped from 14.7% at the start of the year to 12.7% currently. If incremental changes in earnings expectations are a primary driver of SPX returns, the negative guidance is unlikely to give SPX a boost in the near-term.
- And second, multiples are at risk of compressing, not expanding. There is a lot of macro uncertainty around tariffs and emerging inflation trends. Policy uncertainty and high inflation (should it prove to persist longer) tightens up the purse strings for businesses and households, as well as increasing odds that the Fed may not deliver the 2 cuts expected this year. These risks are likely to weigh on earnings expectations as well as valuations via higher or stickier interest rates.
As far as levels are concerned with respect to the above views, 6,143 (61.8 fib expansion) and 6,185 (White trendline) are potential points of resistance should we venture above January weekly highs (6,121 and 6,128) where we saw some supply last week before closing out at 6,114. SPX did print doji-star off those January highs on Friday that will need to be further complimented by a bearish candle for an evening star reversal.
Momentum is positive however with breadth improving on last week’s +1.47% gain. Though the majority of SPX stocks is still shy of reclaiming the 20dma, more stocks have moved above their major moving averages while the net number of SPX stocks making new periodic highs has also inched higher last week.
The VIX has put in the lowest close since the last eve of xmas to finish the week just below the 15 handle. Skewdex (Orange) inching higher last week continues the suggest some bearish sentiment, but this may prove constructive for equities as hedges getting recycled limits downside and sees immediate recoveries as it quite often does.
Putting everything together with respect to the SPX, I’ve turn more neutral if not mildly bullish (holding some pro-risk positions from last week) than I was this time last week when I wrote about expecting a higher vol regime. Geopolitical risks are easing and Tariffs being delayed till April-1st was what changed by trading bias last week, while weaker than expected activity data and market choosing to look past the hot inflation prints has soothed US rates and dollar…
All of which have lead to lower x-asset volatility premiums.
Equities
NDX keeping a close eye on the December high at 22,133 while we are also around fib extension levels from various swings for upside levels, and trendline running off Oct’23 and Apr’24 lows at ~22,035 to the downside.
Mag-7 stock charts look mixed as we await to see some bullishness from the basing action in some, while other recent strong performers faces some stiff technical resistance overhead. The Mag-7 index is back to a key pivot band and set to offer some directional cues from hereon forth; META is on a stunning 20day winning streak apparently the longest on record of any S&P500 company; AMZN attempting to hold support around the 230 handle; TSLA bouncing off a near 61.8 retracement of the breakout leg but likely to be some stiff resistance above.
AAPL retesting trendline resistance again; NVDA price action looking strong but has closed around a key technical level ~140; MSFT attempting to base in the 405/10 region was has been strong support for the the past year; GOOGL finding support at the Oct-Nov’24 highs and 50fib ~185.
European equities notched another weekly gain for the 7th consecutive week and seemed to be getting plenty of mainstream and social media attention last week — major contrarian vibes. UK FTSE showed some bearish price action towards the end of the week and could be levels to watch in the coming sessions.
China indices have performed exceptionally well, but could face technical challenges at these levels — 22,700 HSI a huge pivot level as is the ~3,200/400 area for the Shanghai composite. What’s interesting about those indices is how remarkably well the Demark counts are respected, putting the Shanghai composite in an interesting position where the start of a bullish breakout has run into a 9 countup last week.
Commodities
BBG commodities index finished the week bearish reversal candle, largely driven by the reversal in Gas and metals.
Copper printed a bearish engulfing on Friday and a weekly reversal bar to finish the week; NatGas printed a 13 countup and starts the week lower; Gold bearish engulfing on Friday after some supply was starting to come through above the 2900 handle, and Silver with a long reversal bar from the 33 handle.
Thats the view on Gold and I think it is beginning a 100 dollar descent to reflect lessening geopolitical risks, and possibly to 2700s alongside a multi-month fall in the Gold/Silver ratio.
Rates
Yield curve finished slightly lower wk/wk after PPI revealed PCE components were benign and mostly negative in January, and the UST rally getting further support from the big Retail sales control miss.
Hard to take a directional view on the 10yr yield but I think 4.4% (which also coincides with the 61.8fib) will serve as support with risks still to the upside from there. I have genuine concerns about the impact of reaccelerating goods/food inflation, that is supported by a relatively solid US economy and could be further fanned by Trump’s economic policies.
FX
Latest breakdown in the DXY opens up the next major pivot area around the 106 handle with the 1.272 fib extension at 105.80. I reviewed the major USD charts in the below thread on Friday:
In view of the latest moves in data surprises, GBP is strongest, followed by the EUR, while USD should stay on the backfoot with new lows in the surprise index.
Until there are some major changes in data trends, I expect that to be the flavour this week and will continue to stay short USDMXN USDJPY, and long EURUSD AUDUSD — the latter of which I intend to square up on the RBA rate decision. I expect it to be ‘relatively’ hawkish cut and could be a good time to capitalise on a pop considering metals are looking like they may begin a bearish reversal, while somewhat expecting risk assets to trade in a relatively choppy manner from here.
My short USD stance is more of a rates proxy/differential view than a pro-cyclical one and therefore have little interest to hold commodity-dollars. Major commodities are hinting a reversal while their respective Terms of Trade have already been turning lower.
Finally, despite GBPUSD having the strongest support from the change in economic surprises, I think it’s one of the more tactically appealing counter-trend choices after a 2.5% rally off the recent low, and UK data unlikely to continue surprising to the upside.
Beyond those ideas, I’m still not convinced by a top in USD being in so will be looking to reload some dollars at good levels against the usual suspects EUR GBP CHF and JPY.
That’s all for now, good luck trading.
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