10 to 15 Days

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Prior 2%+ counterintuitive reactions to CPI had a 10-to-15-day half-life as they signaled exhaustion in either direction four out of four times. Also: The MOF is getting fancier.

by Brent Donnelly

July 17, 2024

One of these things is not like the others

Current Views

Flat

Stocks

Yesterday’s rotation / bloodbath was one of five days where we saw a 2%+ move in stocks in the opposite direction suggested by the CPI result. In other words, we got good news on inflation, and bad price. The prior four times this happened (two good news, two bad news, all four SPX went opposite direction vs. what you would expect) … Looked like this:

These good news / bad price setups (or the reverse, bad news / good price) are exhaustion indicators. Buyers are full, they add on the good news, and there is nobody left to buy. I would think that yesterday’s price action is informative, just as price action on those other four days was informative. The moves in the 10-15 days after the prior four episodes were: 6.25%, 4%, 6.5%, and 17%.

Using past moves as prologue, a 4% move from here would take us to 5360 in the SPX, while 6.25% would take us to 5235. That is where we were at the start of June, so that’s not a crazy target if you’re bearish.

MOF

The nature, strategy, timing, and tactics around JPY intervention have changed.

Speed condition not met, but MOF intervenes anyway.
Rate checks in EURJPY suggest concern about JPY TWI, not just USDJPY.
MOF using US economic events to get more bang for the buck on intervention.

Still, all they can do is put temporary floors under the JPY. They can’t push it higher without some cooperation from the Fed, BOJ, and global asset market volatility. As long as vol is low, the level of carry in USDJPY will attract money. Momentum and levels of interest rate differentials suggest that USDJPY is high, but that has been the case for a few weeks as USDJPY started rallying away from rate diffs in early June.

Selling call spreads or one touches above 162 makes sense. If you work at an institution, I would consider selling a 3-month (pre-election expiry) 162.26 one touch for just under 50%. You could also be long cash and sell that thing as a package that offers pretty good carry. It seems likely that USDJPY’s path of least resistance is sideways to small down from here.

Calendar

Next week’s calendar does not scream “breakout coming!” but there are some interesting moments scheduled. US Retail Sales probably the highlight given excess savings have been used up and the US job market is softening. Can the US consumer keep spending?

The podcast is back! This week we talk about the Fed, Trump, the USD, and managing the psychology of low vol markets when your primary strategy is macro directional and your performance is positively correlated to volatility. Note that the link also always includes a transcript for your reading pleasure in the show notes.

Have a spiritual weekend.

Have a great weekend!

HT Bose Stereos