Happy Year of the Dragon to our loyal readers! May the new year bring lots of prosperity to you and your loved ones.
While Asia was away on holidays, cash SPX managed to hit ATHs at above 5,000, BTC printed 50k, and Nvidia became the 4th most valuable company on Earth (beating out Amazon) as risk sentiment appeared to go into overdive.
Alas, markets had other things in mind for us. Yesterday’s CPI served a number that no one wanted, with core CPI coming in at 0.39% MoM, 0.56% on OER, leading to 3m annualized core CPI printing a 4% handle (vs 3.3% prior), and supercore inflation rising 0.8% MoM (largest jump in 2 years), thereby posing a severe challenge to the Fed’s disinflationary narrative. To make matters worse, the share of core spending experiencing deflation declined to 29% from 44%, while those experiencing high inflation (4%+) jumped to 58% to 38%. All-in-all, this was a highly damaging CPI report to risk-sentiment, and has increased the market’s focus on retail sales and PPI-revision data later this week.
Market prices reacted according to the unfriendly print. US treasuries jumped +17bp in the front-end, 5/30s curve bear flattened by 9.5bp, equities sold off 1.5 to 2% with a corresponding drop in gold prices and widening in credit spreads as financial conditions tightened rapidly on the day. US 1y1y rates jumped 25bp as a full hike was taken out between SOFR H4-H5 (March) forwards, and 10y real rates have rebounded back up to 2% as was last week on the morning of the Dec FOMC (‘pre-pivot’). In a nutshell, after pricing in as much as 6.5 rate cuts through December 2024, markets have dialed expectations back to ‘just’ 3.5 cuts now following the inflation report.
SPX fell -1.4% and the Nasdaq fell -1.8%, with growth names expectedly underperforming on the high yield push. Precious metals, regional banks, gold miners, and other rate sensitive sectors were sold. Looking ahead, today’s CPI release and PPI revisions have suddenly gained significance in driving near term sentiment, as the return of ‘higher for longer’ against softening data are basically synonymous with rising recession odds, which could prove to be a true headwind for risk assets in the near term. Furthermore, with realized volatility starting to pick up, the Street is expecting systematic-vol funds to be better sellers of equity exposure from here, adding to the risk of a long-absent reflexive move to the downside should sentiment finally falter.
Crypto activity has been relatively muted despite spot breaking $50K, with futures liquidation surprisingly mild despite the fast rally from $44k. Analysts report four consecutive days of net inflows, offseting GBTC’s outflows with the ‘newborn 9’ drawing a combined $1.46bln haul since launch. However, with price action increasingly driven from TradFi activity over crypto incumbents (BTC futures OIs have been falling as ETF has cannabalized exposure interests), we would be on the lookout for a further tightening in financial conditions to weigh on crypto prices, with a particular eye on gold and real rates performance in the near term.
