Markets came back from an extended long weekend to a sudden ‘risk-off’ breeze across many asset classes, with Fed’s Powell giving a head-scratching message last Friday stating that the economy is resilient enough to handle the current rate levels, after being undeniably dovish just a week earlier. Speaking right after the PCE release, he stated comments such as “we don’t need to be in a hurry” and “The fact that the US economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates”, he didn’t sound like chairman who was eager to slash rates rapidly. Did he get a lot of internal push back (Waller et al.) post his dovish FOMC performance? Were there any political pressures to speak a certain year during an election year? Was he shocked at the market’s dovish reaction to his earlier speech? Your good is as good as ours.
Data was uncooperative over the last few days as well, with ISM Manufacturing expanding for the first time in 2022, significantly better than expectations led by employment, prices paid, and new export order components. The recent inflation releases have also kept US core inflation in an elevated manner, with super core CPI approaching 6% on a 6m rolling basis, and even core PCE climbing back above 3% and significantly above the Fed’s target. Furthermore, an accompanying statement from the S&P Global PMI declared “Average selling prices charged by producers rose at the fastest rate for 11 months as factories passed higher costs to customers, with the rate of inflation running well above the average recorded prior to the pandemic”. Doesn’t sound very disinflationary to us.
In response, the 10y yield has been struggling with a steady rise in yields all year despite a friendly risk back-drop, and a cheer-leading Powell. June cutting odds have faded back to ~55% after being a ‘sure deal’ as recently as February. Futures are still stubbornly pricing in 3 cuts in 2024, thanks to the Fed’s recent dot-plot guidance, though the dovish narrative is likely going to be increasingly challenged should economic data continue to traverse in the current trajectory.
NFP awaits this Friday with consensus expecting a dip in payroll growth to 200k, while the unemployment rate will stay steady at 3.8% and hourly earnings growth steady at +0.3% MoM. Such a data release should be friendly for risk as a continuation of the growth goldilocks scenario. 1-day option straddles on SPX implies around a 0.8% 1-day move, in line with previous NFP releases.
In terms of seasonality, April tends to be a more challenging month for equities, particularly towards the middle of the month, ranking as the bottom-5 worst weeks of the year during that window. Data calendar is relatively quiet outside of NFP on Friday and CPI on April 10th — so perhaps an unfriendly CPI (again) might be the trigger for a potential risk-off move at the end of this month.
In crypto, while meme-coin season remains in full bloom, BTC prices have flatlined around 70k for the better part of a month now, but with quite a few episodes of long-liquidation as traders are sitting somewhat uncomfortably long. Fund rates remain expensive for longs as positioning remains one-sided, with price action tending to be more negative in Asia time (always the case this morning with the stops-led drop the sub $66k), and more positive in the NY session supported by ETF inflows (+183mm yesterday). Are we simply seeing an extended redistribution trade natives are accumulating long positions and slowly selling them to mainstream via ETF holdings, but not with a lot to show in recent weeks? Keep an eye out for a possible downturn in sentiment as it feels that momentum has started to wane in crypto prices at the moment.
