2025.05.04 Weekly
So much cope…
Narratives, over economic data or the Fed, has been my main focus over the past month and this has proved to be the right way of thinking about markets. To review — we’ve gone from Peak escalations where I believed the worst-case scenario adequately priced for the time being, The Art of the Backpedal by Trump and narratives swinging towards deals, then looked at narratives in a way George Soros does in Detached from Reality arguing that the market was in a positive reflexive loop that would drive further momentum, and to the extent that we could see a very “hated rally” in last week’s Don’t care and won’t care.
Despite all the cope on twitter, in financial media, and all the warnings signals and reports I’m seeing everywhere on the initial impact of tariffs observed in logistics and small businesses etc., I still believe the markets won’t care until it has to. And since it is likely we will have some tariffs even after some deals are struck and some rolled-back, the question is when will the market care? I’d say when the narrative goes from deescalations to recession again; for that I would want to see either:
- no deals by tariff July 9th deadline;
- a re-escalation in trade talks; or
- labour market deterioration perhaps starting with tariff-sensitive industries.
To cover the first two points, we are still 2-months away from the deadline, and tensions between the US and China seem to be simmering down while various other trade negotations are ongoing. For the third point, last week’s jobs report suggests those risks are in the clear til the next set of data at the beginning of June for some early evidence of acute economic weakness coming in.
Could be a noisy week ahead but without those to alter the narrative, there shouldn’t much reason to rush in front of the current narrative of deescalations while there is ample time (perhaps a good month or two) to assess the situation before tariff impacts begin to materialise. I don’t think there is much risk of sell-off in the near-term, and could see 2–3% dips bought up, and upside chased.
DATA REVIEW
Generally paying little attention to economic data while market narratives (centered around policies) are the main drivers rather than what’s actually happening in the real economy. We’ve had some updates to labour market data however which is worth paying closing attention, of which can be summaried as Goldilocks — solid job gains, softening wage pressures.
April jobs growth was in excess of 44k on the prior 3-month average with solid gains in key industries (by its proportion of the total workforce).
Of those key industries — Leisure hospitality and Professional & business services both bounced back after a Q1 decline, while growth continued to hold steady in Trade transportation utilities and Education health services.
Updated ECI showed wages to hold steady in Q4 which is consistent with the Wage growth measures of the establishment data trending in the high 3s late last year.
For the early part of this year however, we are seeing wage growth slow quite meaningfully from the 4% levels of last year which is likely to bolster the case for the Fed to start leaning back into cuts after being on hold temporarily, particularly if job gains slows significantly in the coming months on the trade-war impact as many expect.
For the household survey, UER held steady while LFPR continued to rebound which can be considered a healthy dynamic as it implies new or returning job seekers are finding jobs.
On the other hand, Continuing claims does suggest a rising trend in longer-term job losses with the last data point posting the highest since November of 2021, and inching towards the longer-run pre-pandemic average. Initial claims saw a weekly spike but that was attributable to just one state and likely to be a one-off.
JOLTS openings reaffirms the labour market loosening trend in March while the Indeed index suggests it has continued in April.
Separations turned down in March resulting in net-Hires to hold steady for Q1, and as it has done since the brief scare at the beginning of Q3 last year.
Though present conditions have steadied in April, consumer expectations about the future deteriorated more rapidly. 72% of consumers now see a US recession in the next 12-months as being, at least, somewhat likely, which was the highest reading since the last peak reading of 73% in May of 2023.
LOOKING AHEAD
ISM Services today is for me, the most important event risk on the US calendar this week as I don’t think FOMC will signal anything and thus minimal market impact with exepctations between 3 and 4 cuts for the rest of this year. Put another way, there isn’t a reasonable scenario where less cuts are likely, and all other scenarios is either a gradual path of normalisation (say 3 cuts), or something more (4 cuts or more) of which is too early too discern from the economic data at this point. I would therefore consider (the current) 75–85bps priced by December 2025 as fair for the time being.
Elsewhere we have Employment data from New Zealand (Wed) and Canada (Fri), and the Bank of England meeting which is probably the biggest event risk in developed markets this week. BoE is fully expected to cut 25bps to 4.25%, but market will be focused on how strong the MPC’s cutting bias is and whether they are on track to cut another 75bps by year end.
Another busy week with about 75% of earnings done. PLTR kicks us off which, at over 200x earnings is sure to get some attention. You read that right. Forward PE is currently 223.5! A comment made to me some time ago comes to mind that the rollover in NDX started with PLTR; I’m not sure how accurate that is, but both ATH’s were printed on the same day, February 19th. Aside PLTR, plenty of other interesting names for some insights on the various microeconomies, but none that are particularly heavy on index weightings.
EQUITIES
Global equities are looking incredibly resilient.
US Tech/Growth sectors led gains. Only AAPL and Energy was down last week.
SPX poked above last month’s high but the Daily chart does suggest some caution is warranted after returning to the pre-election base (shaded Green), and on course to print demark countup signal this week with a potential 9 countup today or a 13 on Friday.
Similar observations for NDX which sits slightly above the pre-election base (shaded).
Mag7 equal weighted index topped out at the initial measured move and 50% fib.
Momentum is exceptionally strong with an increasing amount of stocks beginning to trade above the 50 and 100 day averages. On the other hand, the 20 day reading being close to maxing out warrants caution as it becomes prone to mean reversions.
VIX decline stalled which is somewhat expected given the event risks this week. What’s interesting is the divergence between SDEX (put premiums for -1sd OTM) and TDEX (-3sd OTM) which, to me, reflects the ongoing uncertainty but less about tariff induced recession fears. So as long as this spread between SDEX and TDEX stays wide, that would be an indication that the market can continue grinding away and that there shouldn’t be much worry about a big sell-off again.
The rally so far has been supported by vol coming in, a strong breadth thrust, and also earnings faring better than expected. 72% of SPX companies have reported so far and according to FactSet…
- Both the percentage of companies beating expectations and magnitude of those beats are above their 10-year averages. 76% reported EPS above estimates, and reported earnings are 8.6% above estimates on aggregate.
- Revenues are softer with 62% beating estimates, and reported revenues are 0.9% above estimates in aggregate, both below longer-run averages.
- Earnings growth is at 12.8% so far making it a 2nd consecutive quarter of double-digit growth. Earnings growth is expected to slow significantly in coming quarters however at 5.7%, 7.8% and 7.1%.
To sum up, charts warrant close attention (having retraced to big technical levels, potential demark sell-signals, extreme short-term breadth readings), but there isn’t much reason to be concerned about the market topping out just yet — 1) deescalation narrative unlikely to change soon, and 2) that narrative can run while there is time before potential risks begin materialising on the real economy.
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Cutting this one short. Will revisit the other asset classes when I return to desk on Wednesday. Korea is on Holiday til then :P
Good luck trading!
