Over the past week, slowing economic growth and declining inflation expectations have once again triggered the soft landing narrative. This is not the first time we have seen this situation. The most natural reaction of the market at this time is FOMO sentiment in stocks, buying credit instruments, Charging fixed rates, shorting volatility, and earning arbitrage gains has been pretty much the standard playbook since the last FOMC meeting, and in the absence of any significant variables, this trend shows no signs of slowing down.

Stocks hit new highs last week, with the SPX up 1.5% to break 5,300, with automakers (+4.4%), tech (+2.9%) and real estate (+2.5%) performing particularly well in a friendly financial environment. The 10-year Treasury yield fell 8 basis points and is now 27 basis points lower this month, while oil (+2%), gold (+2%) and copper (+8%) have also seen nice rallies this month. As the Wall Street Journal article says, what’s not to love about the current investment environment?

Additionally, Wall Street traders believe the recent stock market rally has shifted from pure short covering to new long positions, with Citi estimating more than $50 billion in new SPX index futures over the past month, while ICI reports more than $20 billion in domestic equity ETF issuance month-to-date as retail investors take profits in this rally.

Equity options flows are also pointing in the same direction, with binary options (digital options) pricing reflecting a 25% chance of a further 10% gain in the SPX by year end. Moreover, the call/put ratio for 0 DTE options has risen again during this rally, with about 56% of volume going to calls.

Interestingly, behind all this frenzy, 30-year bonds are behaving like an outlier. According to BoA estimates, 30-year bonds are on track for the third-worst annual return in a century. Loose government spending, out-of-control budgets, overly loose financial conditions, and an inflation-tolerant Fed (where is the inflation target?) are having a negative impact on long-term interest rate tools. Generous fiscal policy will eventually be paid for through higher real interest rates and/or a weaker exchange rate, but the time has not yet come...

There isn’t a lot of interesting data this week until Nvidia reports, and then it’s back to holiday mode again before the NFP and FOMC + CPI for the first two weeks of June. Based on Nvidia’s weighting in the SPX and the volatility implied by Nvidia options, the company has a +/- 0.4% impact on the SPX on earnings day, and positioning in the stock doesn’t seem as concentrated as it was at the beginning of the year.

There is not much news to watch on the crypto front. BTC price is trading at its highest short-term correlation to the Nasdaq since Q3 2024, price action is positive, and native investors are looking to challenge all-time highs again in the coming weeks. Nothing can change sentiment more than price, and nothing can affect crypto prices more than stocks right now. Everyone became a rates trader in the first half of 2023, and now every macro asset class is a disguised Nasdaq day trading tool? Hopefully the temporary market pause will give everyone some much-needed breathing room!