2025.03.24 Weekly

The Great Extrapolation

As we’ve heard from many commentators over recent weeks, it’s easy to over extrapolate huge market moves with paradigm changing narratives, but I think it’s well overblown and it’s time to take a step back.

My view is centered around the idea that narratives have blown way out of proportion which may in fact end up being right. Perhaps US exceptionalism is well and truly dead. Perhaps the EU turned a corner to overcome its many layers of bureaucracy and finds an era of prosperity. But if anything, that’s mostly sentiment talking and these narratives can take more than just a few months to prove themselves. I for one, am not convinced… at least not the extent that is implied by the market.

Macro data review

US

Retail sales (White) was 0.2% below the 0.6% expected and prior month saw a downward revision to -1.2% from -0.9%. Core (Blue) printed as expected at 0.3%. Though the longer run trend in Sales growth turned negative this year, it still remains to be seen whether this will materialise into a 3–6month long period of consumer weakness. My theory is that it won’t.

Unemployment claims is very steady — trend in initial claims turned slightly higher so far this year with continuing claims at the high of the recent range, but the non-seasonally-adjusted initial claims continued to fall and at the lowest levels since October.

Elsewhere

China — trend is up! Last week’s industrial production and retail sales figures added to the recovery trend with both beating expectations.

Euroarea — sentiment reacting favourably to the shifting political landscape and potential for higher fiscal spending. While I don’t expect that sentiment to die out, I get the sense it is overcooked and will be a while till that materialises into something meaningful in a way that it will be reflected in the hard data.

UK — unemployment claims are creeping back up after declining into the new year. There is a lot of fundamental headwinds associated with the UK, and though the data trend is positive the last few months, it is beginning to turn in recent weeks.

Australia — had a very weak jobs report last week which is biggest negative month of jobs growth since January of last year leading to the economic surprise index to plummet. There are some seasonal weaknesses at this time of year however so it would be premature to jump to conclusions for the time being.

Japan — national core inflation was 3%, above the 2.9% expected but below the prior month reading of 2.9%. Apart from the Services sectors, Japan data is showing some weakness on the whole.

Canada — inflation surged +1.1%m/m, taking the yearly rate to 2.9% which is the highest rate since March of last year. Retail sales with -0.6% but that came after a 2.6% print the prior month. Overall trend is positive over recent months which is interesting considering the strongly negative macro sentiment — possibly something to consider for new trade ideas.

Recent weeks have been good for global macro data on the whole. Where trends have been strong continued to stay strong, and where there has been weakness has started to turn higher.

Central Banks

FOMC

Rates were held unchanged for a 2nd consecutive meeting, SEP projection of 2 rate cuts for 2025 was unchanged while core PCE was revised +0.3% and growth -0.4%. QT is going ahead in April with Waller voting against the move as other notable development. Market reaction to the meeting was dovish, but market pricing in the lead-up did reflect potential for a more hawkish outcome. On balance, I assessed the FOMC as slightly hawkish with the key message from this meeting being ‘greater uncertainty’.

BOE

Rates held steady (8 to 1 vote) as expected but comments erred on the slightly hawkish /cautious side with inflation forecasted to rise to 3.75% over the next 6-months. Like the Fed, rates were likely to hold steady until uncertainty clears.

BOJ

Rates held steady (9 to 0 vote) as expected. Comments did lean on the hawkish side with references to persisting Services inflation and strong wage growth trend with average spring wage increase of 5.46% being above last year’s level.

SNB

Rates lowered 25bps to 0.25% which makes it the 5th consecutive cut since March of last year. Comments did lean hawkish which, to me, seems like they are done and will be on hold for a long while now with longer-run inflation seen at 0.8% and a recent recovery in the domestic economy.

Equities

Global equities looks more stable with the All countries world index (ACWI) making a higher weekly HLC and emerging markets (EEM and EMXC) pushing higher. Big reversals seen in the US Mag7 and China’s Terrific10 which is a welcomed sight given my view of recent themes to revert from being overcooked. Other equity markets look relatively solid after last week too.

US equities are still sitting below the 4-week average and looks to have found some solid footing after last week and would begin to look particularly constructive if US markets can finish the week with a higher weekly HLC.

With OPEX now behind us, I would expect a lot of negative gamma weighing on SPX to have cleared thus allowing the SPX to roam free whether that be the upside or not. Albeit a rare signal, looking at OPEX’s since 2015 where SPX has had a negative 60-day trailing return (i.e. negative return since the previous quarterly OPEX), we have seen them market short-term troughs in 4 out of the 5 signals.

Technically, SPX has bounced from a strong price region that is the measured move of the break of trendline projected from Nov’23 and Aug’24 lows, also of which that measured level coincides with a strong pivot level around the Jul’23 and Aug’23 peaks (Yellow band). The 5650–5700 area (Green) being the October pre-election lows is the next hurdle for further upside and given how futures are shaping up ahead of the open, SPX is on course to gap up well clear of that area to open at 5732 as I write. The signal for a relief rally does not get much better than that…

NDX also looking make gains above the 20k handle that would make the last bearish trendline break look like a ‘falsey’ — an often powerful reversal signal. My long equities is expressed via NDX as I think the bounce will be tech-led while they are less impacted from another trade war.

The theme of US no longer being exceptional has dominated recently as seen with the outperformance of Europe as well as the hammering of DXY. But I think the recession like repricing and narratives around increased defense and infrastructure EU spending is overcooked. Looking at the relative performance between Europe and the US (Stoxx50 vs SPX) below, the spread has begun to turn at prior inflection points after putting in a straight line rally without breaks — looks like its due one.

While I don’t disagree with the EU positivity, I do think there is more than enough baked in for now and will imo, need to see the initial optimism prove itself in the hard data for further outperformance. The US will also need to prove that the last few months was simply a blip after an exceptionally strong period late last year. 1Q25 earnings season isn’t far away, and that along with the next set of macro data will be pivotal to assess whether the US exceptionalism story is well and truly dead. I’m not so sure…

Commodities

Commodities have held up well driven by the bounce in the major cyclical commodities like Crude oil, Copper and Lumber. Crude closed above the 4-wk average after an inside bar the week before, and industrial metals looking particularly strong. Precious metals rally is showing signs of slowing down with the BBG Precious metals index printing a weekly doji bar.

Given my preference for a reversal in relative performances on seemingly overcooked narratives, one idea is long Crude vs short Gold which I have a small pair trade on. I don’t have high conviction on those individually, but the charts look decent and I like the narratives of OPEC+ looking to tighten supply next quarter, and US growth scare that has helped to give gold a boost to find some middle ground from the extremes.

Rates & FX

While it is difficult to argue for a big rebound in yields, think it is safe to assume that they have found a floor after the growth scare move, and that it marked the range lows.

Alongside the bottom in yields, USD has begun to find support in recent weeks. EUR running out of steam, as is the rally in GBP and JPY. Loosely speaking, I think we are beginning to mean revert beyond the 20 to the 50dmas — especially if my overcooked narratives view proves correct.

Recent flows already appear to be heading in that direction too. On a 3-month rolling basis, USD flows have flipped net positive for the first time in about 2-months, flipped negative for EUR and GBP, while CHF and JPY longs looked to be slowly unwinding. The higher betas have turned bearish over the last few weeks, but I suspect those will turn more neutral as we get some normalisation of market narratives.

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Good luck trading!