2025.02.10 Weekly
Higher vol regime ahead
That’s at the top of mind at the moment — an elevated vol environment after years of lower vol. I recall seeing a post on x a couple of weeks ago pointing to the EURUSD ATM vol putting in a huge reversal giving the “good for stocks” label.
Vol move do tend to be noisy/spike-y due to the nature of positioning periodically rolling off and winding back up again. And while that post may have been a good short-term observation (was a big reversal to be fair), that’s all seems to be good when thinking more contextually which I aim to note in the below journal.
DATA REVIEW
ISM services missed expectations as activity and new orders moderated from a particularly strong back half of 2024. Good news is that the Employment component improved while Prices cooled off.
UOM sentiment weakened while inflation expectations surged. The astounding surge in 1-year sums up the consumer surveys recently which have turned extremely volatile since the election period due to politically charged responses — Democrats have gone extremely pessimistic against comparatively smaller increases in optimism among Republicans.
This chart posted by Parker Ross says it all — Democrats see 1-year inflation at 4.2% while Republicans see 1-year inflation 0.10%. Amusing as that may be, independents seem a reliable gauge here which has ticked higher from below 3% to 3.2%, fitting the narrative of fresh inflation concerns hitting consumer sentiment.
RCM-TIPP Consumer survey of economic optimism was marginally higher after going net positive (above 50) for the first time since August-2021. It’s dipped a little from the post-election peak but remains positive at 52.0 and suggestive of other consumer surveys being overly pessmisitc.
JOLTS openings missed but shouldn’t come as a surprise as it looked like some fluke beats in prior months when compared against the Indeed index and are now more aligned.
Hires picked up while Separations was flat suggesting that there has been some positive turnover from the drop in openings.
Jobless claims ticked higher but relatively stable. Nothing to see here.
Finally NFP, expectations of 167k missed coming in at at 143k vs but contextually, this was still a strong jobs report considering the very strong December report got revised up to 307k from 256k, and November revised up to 261k from 212k — a net 100k more jobs than initially reported for the prior 2 months. That takes the 3-month average to almost 250k.
We also had a downward revision to the January-March 2024 period from the annual adjustments of 589k, but that’s well in the past and what’s more relevant to the now is that jobs growth is not only solid (with trend growth being around +125k per month), but particularly strong in the goods economy (e.g. manufacturing, trade/transportation) — suggesting the economy is on firmer footing.
Wage growth stronger in January taking the 3-month annualised rate to 4.47% but Average Hourly Earnings is likely be distorted by the drop in work hours during months that had adverse weather impact.
Average Weekly Hours fell to the lowest in almost 5 years equaling the low from March 2020.
Unemployment rate fell to 4% which Kashkari thought was the most important number from Friday’s set of data. It did coincide with an increase in labour force participation however, so some time is needed to see how this evolves against Trump’s immigration policies.
EQUITIES
SPX finished the week higher but has for the 3rd consecutive week saw Friday selling with increasing magnitudes. Technical bias is shifting bearish again after Fridays bearish engulfing and stochastics closing below the signal line, while RSI is showing a trend break lower.
At the start of the year, I argued that SPX could well undo the election rally and make a return to the October lows just under the 5700 handle, as the market begins to digest the negative impact of Trump’s policies after the initial optimism. My conviction has waned somewhat after the early January bounce but would begin to increase once more if the 20dma falls below the 50.
Also, my observations on X and various groups makes it appear that many retail traders are overly optimistic and ill prepared for market volatility — as I posted on X:
Many still appear unwaveringly conditioned to the “higher” mentality but I think it’s a time to take a step back. Market has struggled for continuation beyond recoveries over the past month or 2, becoming evidently choppier, and there’s probably a lot more of that ahead. I.e. this is the kind of market regime where incremental appetite for risk tends to go weaker, not stronger. Prob a lot of great 2-way risk to trade but thinking about those conditions makes me have a bearish risk leaning.
The VIX is starting to pick up a little bit after a period of very low volatility from mid-2023 to mid-2024.
A less noisy view would be the SkewDex which measures the difference between 30-day ATM puts and 1-standard deviation OTM puts, essentially giving us a measure of put premiums — the higher the premiums, the higher the demand (and therefore expectancy) for market volatility. Looking at the rough trading ranges I’ve outlined on the chart, we can see the recent ranges has picked up substantially and sitting at the higher end of the period that preceded the extremely low volatility during 2024.
The AAII Bull-Bear spread has tipped back into negative for the week ending on Wednesday as the markets were rallying and interestingly before the Friday sell-off. Unsurprisingly, the last 3 years looks a lot like the VIX and SkewDex charts above inverted.
COMMODITIES
One of the main concerns I have is inflation coming back via assets with more volatile price movements. Keeping track of core inflation is a thing of the past with Services moderating, but goods inflation is back and commodity prices have been strengthening.
The above chart is the G10 inflation surprise index against Bloomberg commodities index which is breaking out. It must be said that it’s been more about the surge in Precious metals that’s been driving the index higher but Food and Energy related commodities is also looking up.
The Agriculturals sub-index (top) and Energy (bottom) has both broken out at the start of the year and is looking to build on an uptrend and could very well drive a reacceleration in inflation. And though it could prove temporary, inflation is still elevated in some major economies and could stay entrenched for longer should it translate to higher groceries and gas prices for consumers.
Returning to precious metals, Gold has on its 7th week winning streak which is historically quite rare. The last time this streak was exceed was during QE of 2020 at 9 weeks, and previously equalled in 2011 also at the height of the post GFC QE era. I’ve included a 12-week rolling returns for gold to show that there has tended to be 4–8weeks of negative returns on similar run ups.
Technically, Gold has its sights on the 3k handle taking the measured move from the base of the rally in the 2nd half of last year, to the breakout from the Nov-Dec consolidation. 2900 figure is a big one psychologically just like 99s and 101s are to 100 for instance (a price action pattern I’ve seen time and time again), and may offer some insight on whether it plans to take a breather or keep pushing on for 3k and above. Silver is also showing a strong upside bias but has struggled at the prior shoulder levels above the 32 handle. Perhaps Silver is the better tactical choice for the mean reversion trade.
Oil and Gasoline is looking up after find reasonable support levels. With Trump giving plenty of reasons to expect Oil prices to stay down, I don’t expect it to be a quick and easy fix on his part. No real directional view other than thinking the last consolidation leg off the early January high could be the trading range over the next month or so.
RATES
UST curve has been bull flattening over the last three weeks with the front end seeing a slight recovery last week.
Zooming in, looking at the last 3 closes last week, we can see that bond market has been reacting well to the data and NFP in particular. More top tier data this with with CPI PPI and Retail sales, and should they come in strong, we could see UST to being back under pressure after several weeks of bull flattening.
10year retraced back to the 4.5% level and technically, the Wed-Thu-Fri candle formation does point to a further recovery. 4.5% could probably be assumed as a reasonable ‘fair-value’ level for the short-term but when thinking about the skew of risks, I think the risk of the next 50bps move is greater on the upside than it is the downside — US recession odds are slimmer while inflation odds and stickier rates are ticking up. Should we end the week at 4.65% from some strong data, bonds would look to stay under pressure til the end of the month.
FX
USD has recovered following the bounce in yields last week, with the exception of CAD recovering throughout the week which looks to be a combination of shorts unwinding and a decent payrolls on Friday, unlike MXN which struggle to hold onto gains.
We head into the week with strong momentum in spot EURUSD GBPUSD to the downside and USDCHF to the upside. 1-month risk reversal moves (which have been normalised to a 21-day z-score) are in support of those moves and interestingly, USDJPY is starting to pick back up a little bit.
Going into those charts, momentum studies on EURUSD and GBPUSD has bearish bias after last week’s turn lower. These are still a sell on rallies for me given the risks of a commodities rebound (Energy in particular) to be the most problematic for these pairs out of the majors. Barring any major changes, EURUSD 1.0340/60 and GBPUSD 1.2440/50 area would be ideal levels to load up the shorts.
USDCHF momentum is potentially on the build again breaking back above the longer-term trendline with a bullish stochs cross and RSI breaking upwards. USDJPY chart gets the juices going with a long-doji formed on Friday in the middle of a key pivot area (grey-shaded), and we are seeing some good continuation today to start the week that could get further boosted by momentum studies turning bullish.
TRADING VIEWS
Never an easy game playing the short-side in US equities, even more so the almighty Nasdaq but I got short last week and will look to increase size this week. The short is conditional on economic data giving US yields and dollar a lift and causing risk assets little bit of discomfort, while expecting the tariff related uncertainty and volatility to keep risk appetite subdued.
In commodities, I keep an eye on long Crude oil which is particularly attractive with bullish momentum beginning to gain traction out of a key area of support; and the less appealing short Gold opportunities which I think there is good risk/reward have a few small punts around the major economic releases this week.
In FX, I continue to maintain a pro-USD bias and continue to focus on trading around a core long USD book vs EUR GBP CHF and JPY.
That’s all for now, good luck trading.
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