2024.06.10 Weekly

Strong but moderating

DoejiStar
14 min readJun 10, 2024

Maintaining a bullish goldilocks macro view from inflation easing while economic activity is in gradual moderation that will lead to the fed making at least one 25bps adjustment cut towards the end of the year. That said, I think a tactical view is the way to go for the 2nd half of June’s trading.

Economic data review

Manufacturing activity slumped further but Services was very positive.

Services rebound was driven by Business Activity which the biggest m/m improvement in 3yrs supported and in New Orders though there are more firms expecting slower business.

Employment outlook for manufacturing turned further positive while Services remained in contraction but showed marginal improvement, and outlook on prices eased.

Labour market continues too loosen via a continued decline in vacancies. V/U is now down to 1.24 openings to unemployed, the lowest since June 2021.

Beveridge curve returned to pre pandemic normal levels signifying moderating labour market conditions and potentially wage pressures.

Another strong jobs report with above 1yr-average job gains.

AHE also accelerated putting annualised wage growth above the 4% mark after going briefly below last month.

Although the latest jobs report has not given any confidence that wage pressures are cooling, my view is centred on what we are seeing with the broader trend of economic data which is one of ‘moderation’. Loosening labour market (ISM services employment contraction, continued decline in Vacancies to Unemployed) implies a softening wage growth outlook and, the exceptional strength in the consumer economy appears to be peaking (drop off in Retail sales and PCE personal spending last month as well as retailers flagging softening demand).

Atlanta Fed GDP nowcast gave a brief scare with the sharp decline recently, but it reflects idea that economic data is ‘moderating’, and thus inflation pressures with a lag.

Cleveland Fed inflation nowcast points to softer m/m headline prints after 0.4% in April, 0.3% in May and around 0.1% expected for the next 2 prints. Wage inflation is laggy, and though a hot CPI report on Wednesday could change things, I think the psychology of the recent easing headline inflation will help to ease broader sentiment towards inflation and therefore wage inflation.

I look and compare these spreads as a rough gauge of where recent inflation data puts us against the policy rate expectations. If CPI confirms its current softening path and eyeballing these spreads, I think it would be reasonable to expect at least 1 cut by the end of this year, and up to 4 cuts over the next 12 months to adjust for the gradually easing inflation and moderation in economic data. I therefore see little reason to take a bearish macro view and continue to maintain a goldilocks view until we see some significant cracks in consumer spending and the labour market.

Risk view

Despite my view on Goldilocks I’m starting to think more tactically about my positioning — profit taking for longs taken into May month-end (retaining core longs from the 17k region) while trading to the short side tactically into the June OPEX which I previously held that risk would continue to rally until. Chart below shows the average SPX performance into each quarterly OPEX (3rd Friday of the month) and Expiration (last Friday of the quarter) of the last 30 quarters.

We are 10 sessions from the June OPEX with momentum behind the rally stalling in recent sessions, and the more it does so, the more that likely begets a profit taking market. Once we get a pullback and assuming there were no big surprises from the CPI report and FOMC dot plots, I am thinking of retaking some longs into month-end where we tend to see some mean reversion of OPEX moves.

Above patterns also aligns with the Q2 Seasonality chart I posted at the beginning of the quarter which has been tracked ‘roughly’ well so far this quarter, and market technicals reviewed below is beginning to look challenging for a continued rally.

NEWSFLOW

MARKETS

  • S&P 500 Hits 25th Record This Year as Tech Soars (BBG). Nvidia’s Rise to $3 Trillion Fuels ‘Jensanity’ in Tech World (BBG). US stocks close slightly lower after jobs data — For the week, the S&P 500 gained 1.32%, Nasdaq rose 2.38%, and the Dow added 0.29% (RTS). Stock market faces midweek double whammy with Fed decision following CPI inflation reading (MW). China’s $2 Trillion Stock Rally Lures Global Fund Holdouts Despite Risks (BBG). Global equity funds rack up robust weekly inflows on rate cut bets (RTS). US bond funds gain robust weekly inflow as yields ease (RTS). Investors queued up for US high-yield bond funds as rate cut hopes grow (RTS).
  • Strong US Payrolls and Wage Growth Push Back Bets for Fed Cuts (BBG). JPMorgan, Citi Scrap Fed Rate-Cut Bets for July After Jobs Data (BBG). Dollar Rises to Highest in a Month as Fed Cut Bets Stall (BBG). Fed Dot Plot Is Set to Offer Glimpse of Rate-Cut Resolve (BBG). ECB and Canada cut rates as easing among big economies gets going (RTS). Rate-Cut Bets Supercharge Longest Bond Winning Streak This Year (BBG). Global central banks plan to increase dollar reserves, survey suggests — net 18 per cent of global central banks plan to increase their allocation to the dollar over the next one to two years, the move marks a sharp rise from a net 6 per cent a year ago (FT).
  • Hedge Funds Flip Flop on Yen Option Trade as BOJ ‘Spooks’ Market (BBG). Japan’s Retail Trader Masses Get Right Back Into Yen Carry Trade (BBG). Gold Dips Below $2,300 as Jobs Dash Fed Bets, China Buying Pause (BBG). OPEC+ Supply Move Spooks Oil Traders Still Waiting for Summer — Global physical crude traders still dealing with a supply glut, OPEC+ producers plan to gradually return barrels from October (BBG). Aramco Cut Oil Prices to Asia for July Amid Demand Concerns (BBG).

AMERICAS

  • US job gains surge past expectations, wage growth quickens — underscoring the resilience of the labor market and reducing the likelihood the Federal Reserve will be able to start rate cuts in September (RTS). Job openings fell again in April, hitting lowest level since February 2021 in a sign of labor market weakening (CNBC), labor market normalizes back to pre-pandemic normal (RTS). US private payroll growth slows to 4-month low (RTS). Compensation Plans at US Small Firms Decline to Three-Year Low (BBG). US weekly jobless claims edge higher, Q1 labor costs revised lower (RTS). US services sector activity rebounds — services sector snapped back into growth mode in May after a short-lived contraction in the prior month, measure of business activity improving by the most in three years (RTS). US Consumer Borrowing Restrained by Drop in Revolving Credit (BBG). US Factory Activity Contracts as Orders Slide, Output Weakens (BBG). US Home-Purchase Applications Fall by Most Since Early April (BBG).
  • Joe Biden cuts Donald Trump’s lead on handling of US economy (FT). ‘The economy is all people care about’: Donald Trump plays a strong hand in Las Vegas — Rampant inflation could push Nevadans to vote for Republican president for first time in 20 years (FT).
  • Bank of Canada Cuts Rates to 4.75%, Signals More to Come (BBG). Big Six Banks See at Least Two More Canada Rate Cuts in 2024 (BBG). Canada’s jobless rate ticks up in May, wage growth accelerates too (RTS). Mexico Prices Undershoot All Forecasts Before Rate Decision (BBG). Money-Minting Peso Trade Upended by Mexico’s Election Shock (BBG). Mexican Peso Will Bounce Back After Election Selloff, Top Forecaster Predicts (BBG).

EUROPE

  • European Central Bank cuts interest rates for first time in 5 years — Officials warns further reductions will depend on inflation easing (FT). Lagarde’s Reluctant Cut Leaves Markets Guessing on Next ECB Move (BBG). Lagarde Says Key ECB Wage Measure Held Steady in First Quarter (BBG). ECB’s Preferred Pay Gauge Accelerates in New Inflation Warning (BBG). ECB Officials Get Cautious on More Cuts as Wages Pick Up (BBG). ECB Rate Cut Was Logical After Inflation Retreat, Nagel Says (BBG). German central bank warns on inflation and cuts 2024 growth outlook (RTS). Hedge funds raise bets against European government bonds to two-year high — Traders bet ECB will have limited room to cut rates this year with inflation above target (FT). Euro zone business activity expands at fastest rate in a year — services industry outpaced contraction in manufacturing, price pressures easing (RTS). German Unemployment Up More Than Expected, Damping Rebound Hopes (BBG). German Industrial Production Fell Again in Poor Start to Quarter (BBG). German Factory Orders Fall, Highlighting Continued Struggle (BBG). European companies step up efforts to decouple from China — Move comes as Brussels increases scrutiny of goods from world’s largest export economy (FT). France and Germany lead swing to right in EU elections, exit polls show — Marine Le Pen’s party wins French vote for European parliament as AfD beats Olaf Scholz’s coalition (FT).
  • Relentless Selling Continues Even as UK Stocks Surge — In the last three months, UK equities have trounced their rivals, And yet no one’s buying (BBG). UK services firms report slower growth and weaker inflation, PMI shows (RTS). UK Companies Expect Price and Wage Pressures to Ease Further (BBG). UK Rents Rise at the Slowest Pace Since 2021 as Demand Eases (BBG). UK House Prices Stagnate With Small Dip in May, Halifax Says (BBG). Homebuilder Bellway Sees Signs of Recovery in UK Housing Market (BBG). UK Construction Industry Sees Strongest Growth in Two Years (BBG). Britain’s Local Authorities See Budget Shortfall of £6.2 Billion (BBG). Sunak Hits Labour on Tax But Struggles to Undermine Starmer — Poll gave premier the edge but Tories trail far behind Labour, Starmer slams Conservative record, promises to change the UK (BBG). Labour Party Plans to Overhaul UK Business Rates to Help Small Firms (BBG). Labour Plans Mortgage Guarantees to Help First-Time Buyers (BBG). UK Investors Expect Labour to Break Pledge Not to Raise Taxes (BBG). Tax Hikes Needed Whoever Wins UK Election, Analysis Shows (BBG).
  • Swiss Inflation Matching 2024 High Erodes Case for SNB Rate Cut — Consumer prices rise 1.4% from last year in May, as expected, Franc snapped losing streak after hawkish comments of Jordan (BBG). Danske Sees Fewer Norway Rate Cuts in 2024 on Wage Risk, Economy — Norway key rate seen at 4% at year-end versus 3.75% earlier, Swedish economy poised for relief this year (BBG). Norway Home Prices at Record High After Five Months of Gains — Seasonally-adjusted house prices rose 0.6% on month in May, Data makes a September rate cut less likely (BBG). Sweden Says Focus Shifts to Growth With Inflation Soon Defeated (BBG). Swedish Housing Price Recovery Fueled By Interest-Rate Cuts (BBG).

ASIA

  • China’s robust services activity drives up employment (RTS). China’s exports rise solidly, but slower imports temper outlook (RTS). Chinese Move Billions to Hong Kong Banks, Seeking Higher Yields (BBG). China’s Homeowners and Banks Are Trapped in a Mortgage Mess (BBG). Hong Kong Luxury Home Sales Rebound as Wealthy Buyers Return (BBG).
  • Japan consumer spending rises in April for first time in 14 months (RTS). Japan’s service activity extends gains, price pressures persist, PMI shows (RTS). BOJ’s Nakamura Says Appropriate to Maintain Monetary Policy for Time Being — Nakamura dissented from the BOJ’s decision in March to end negative interest rates (WSJ). BOJ Weighs Reducing Bond Buys as Early as June Meeting — Bank isn’t intending to surprise bond traders: people familiar, JGB bond futures pare gains, yen strengthens after news (BBG). BOJ must be vigilant to yen’s impact on economy, says deputy governor Himino (RTS). Japan’s Biggest Base Pay Jump Since 1994 Still Leaves Doubts (BBG).
  • Australia economy slows to a crawl in Q1, grows 0.1% q/q (RTS). RBA Won’t Hesitate to Act If Inflation Sticky, Bullock Says — household spending ‘very, very weak’, Government’s energy rebates unlikely to impact core inflation (BBG). Australian Home Loans Jump as Rental Yields Lure Investors (BBG). New Zealand House Prices Fall For Second Month Amid High Rates (BBG).

EQUITIES

Though the price action in global equities has been resilient, the rally has stalled over the last few weeks.

Resilience has been US driven making new ATH’s and mainly from Tech stocks but there are signs of momentum exhaustion on the weekly, while last two daily bars have been suggestive of a turn.

Non-US and China Developed and Emerging market indices are showing signs of some fatigue.

High flying European equities are now taking on an interesting complexion — large-caps have led the rally and broadening out into medium caps which have evolved into a stall in the Stoxx50 for the past couple of months, and Stoxx600 has put in a bearishly divergent double top.

The weakening European sentiment is evident looking at the Cyclicals-Defensive spread making lower lows, while the US spread while resilient, looks like it could be beginning to stall out.

Small/Medium cap index is fading from the pivot area above with RSI closing the week lower and below the mid-line.

Most-shorted stocks index is showing a great deal of fatigue at the recent swing highs with RSI pointing into bearish territory.

NYFANG+ has put in 2 indecision candles into the weekend with bearish RSI divergence and closing below the prior swing high.

Finally, while the market is showing very little interest in downside protection with SDEX and TDEX stretched to the lows, I think one can take a contrarian view with how the above charts are set up ahead of some major event risks this week. Thus I think its reasonable to expect put premiums to get bid up.

COMMODITIES

Bloomberg commodities index reflecting the weaker price action in cyclical equities.

While commodities are broadly on a pullback, Energy prices are on the rebound which will act as tailwinds for risk. I think metals like Copper is looking attractive for a pulback entry at some point, while NatGas which I’ve been flagging in prior weeks has put in a nice rebound.

On the whole, I don’t have a concrete view on commodities but do favour the reflation side on economic data (including China’s) holding up reasonably well, and my longer-term goldilocks view making demand concerns overly emphasised.

RATES

Despite the late week 15bps+ rebound in yields last week, the curve is still lower than it was on prior week close (Purple, change in Red), and from the beginning of May (Green, change in Yellow).

This is nothing for bears to get particularly excited about, but should the FOMC dot plots revise their longer-run medians higher, we could see one more push higher.

Should the 10yr go above 4.5% again and trigger some volatility in risk assets, I would take a contrarian view and buy into weakness as I think yields above 4.5% will continue to get faded. Something to keep in mind as I do expect some volatility to creep in over the coming weeks.

Market has pared back expectations of a September meeting cut but I don’t think this matters too much for the momentum as I expect pricing to drift around 1 and 2 cuts for 2024 and no less than 1 cut.

Market is currently pricing in about 37bps of cuts for 2024, giving the 2nd cut roughly 50% odds and I think this is sufficiently reasonable for now especially if CPI prints in-line with expectations.

CURRENCIES

G8FX Index
  • AUD could see more downside but I like it on dips for the medium term. Some cracks showing in the labour market but that negativity should be offset by price pressures remaining firm and some better newsflow out of China.
  • NZD fundamentals remain weak and I think RBNZ hawkishness is a little misplaced. AUDNZD longs looks very attractive to me here.
AUDNZD
  • CAD has been beaten to a pulp but theres a lot of negativity in the price, I like buying it tactically as a low-beta USD / risk-on candidate.
  • USD more resilience expected on exceptionalism well and truly alive.
  • EUR reacting negatively to exit polls pointing to a win for the far-right. I have my eye on EURMXN expecting the 20 handle to cap the rally.
  • CHF is now looking very overbought around this key pivot area. Last week I mentioned my interest in CHF as my preferred funder for AUDCHF and CADCHF longs. Its at a big pivot level with Demark 9 countdown printed last Friday. It may not be a smooth ride back up but I think there should be some decent short-term trades in it to trade around a constructive longer term view.
AUD*NZD*CAD*MXN / CHF
  • GBP upside looks like its tapped out with the scrutiny on UK budget, debt, potential tax hikes, and amid inflation pressures easing while USD stays resilient.
  • JPY is an interesting candidate for longs especially if the US 10yr stretches above the 4.5% handle. I’ve got GBPJPY in mind for this one.

That’s all for now, good luck trading!

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