Risk assets enjoyed firm close to the week with financial conditions continuing to ease post the softer job market releases as of late. Equity markets shrugged off a poor U-Mich and inflation expectations, with the headline print falling to 67.4 from 77.2 the past month, while 1yr inflation inflation expectations print jumped to 3.5% vs 3.2% prior.
Overall, macro economic surprises have fallen to the weakest levels in 1.5 years, with Citi’s hard data surprise seeing the biggest one-day drop in a year last week. While a ‘hard landng’ call is definitely still way early to be made at this point, it is becoming evident that the US consumer is indeed finally entering into a soft patch with declining consumer savings, still lackluster PMIs, higher rates dragging down credit demand, and a labour market that is finally feeling the effects of gravity.
All eyes will be on CPI Wednesday this week as a key driver of price action in the medium term. While the market is certainly hoping for a softer print to steer the disinflation narrative back on course, recent market-driven ‘CPI fixes’ have been steady with traders expecting around a 3.4% YoY print in May, and a further softening to ~3.1% in December. Easier financial conditions are matched off against softening consumer credit demand in the near term, while the path of oil price is likely to drive the inflation trend and expectations into year-end.
Crypto prices have been disappointly weak with BTC seeing a sharp correction from 63.5k down to 60.5k on Friday’s NY session. ETF flows saw a small -85M outflow, while leading global CEX reported a drop in spot trading volumes in April, the first in about 5 months. With spot prices consolidating for much of the past 1–2 months, price action definitely feels heavy with incumbents naturally still skewed long. Furthermore, while implied volatilities have dropped heavily as directional traders are selling upside calls to harvest extra income, while longer term players are back to monetizing IVs to generate yield in the current lull in market sentiment.
