Nobody knows whether the Fed is going to hike, nobody knows where FX is going, frankly nobody has any idea what’s going on.
Hello. It’s Friday. Thanks for signing up. I’m Brent Donnelly.
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This week saw a mixed bag of US data and felt more random than directional as markets chased the USD down on Thursday then back up on Friday, commodities traded heavy in the first half of the week then ripped, and equities ripped then dipped.
Meanwhile, we remain firmly ensconced in the soft landing that so many said was impossible. Next cycle, when people in 2028 or whenever are saying “tHere’s nO such THinG as a sOfT lanDing!” … You will be able to add 2023/2024 to the list that also includes 1995. Soft landings are rare, but so are Mickey Mantle rookie cards. Yet we don’t say “There’s no such thing as Mickey Mantle rookie cards.”
Here is the historical record as per Alan Blinder:
The burning question now is whether inflation will cool in the USA, or not. We will get another clue next week with the 15MAY CPI release. Each month that CPI disappoints is another month we have to roll the “rate cuts are gonna happen in four months” out another month.
While Powell essentially clipped the rate hike part of the distribution last week, the Fed’s forward guidance has lost all meaning and markets will certainly override him if inflation reaccelerates. I don’t think that’s going to happen, though, because: commodities are under control, auto insurance pricing has probably peaked, and used car prices are dropping again (down 2.3% in April). Still, the shelter portion of CPI has been tough to forecast and therefore anything can happen on any given CPI release.
The Bank of England joined the ECB at the dovish end of the pitch this week. The key moment was this (via Bloomberg):
“Before our next meeting in June, we will have two full sets of data for inflation, activity, and the labor market and that will help us in making that judgment afresh. In saying that, let me be clear that a change in the Bank Rate in June is neither ruled out nor a fait accompli,” Bailey told a Thursday press conference.
He said it’s likely the BoE will need to cut the Bank Rate over the coming quarters and make monetary policy less restrictive over the forecast period.
“Possibly more so than is priced into market rates,” he also later said. That would be consistent with making sure inflation does not fall noticeably below the target, he said.
There had been some question this year as to whether the UK would be more like the USA (higher for longer) or Europe (three cuts priced for this year). It looks like (despite Brexit) Great Britain is still part of Europe.
Equities roared this week and volatility has sagged with the VIX now on a 12 handle. Friday saw some giveback as we are getting close to the major resistance in the NASDAQ up at the all-time highs.
It’s notable that a bunch of consumer-facing stocks are dumping after earnings as SHOP, DUOL, and UBER all soiled the bedsheets. Here are the charts:
These are the type of equity moves that might alarm you if you were betting on a strong US consumer.
The markets were alarmed more generally on Friday as the University of Michigan survey showed a rise in inflation expectations from 3.1% to 3.5%. One thing we cover in depth in Spectra School is how to be a smart consumer of data. In this case, have a look at the series and tell me if we should be concerned about this month’s release.
The signal-to-noise ratio here is about 0.05. It’s going up and down 1% in any given month. Also, this figure follows inflation in real-time. People’s expectations are almost exclusively driven by the current level of inflation. Therefore, this series is pretty much useless. If the market cares about it, you still have to (for one day), but it’s not important in the bigger picture.
Hey, did I mention I do a global macro podcast? Here’s this week’s.
I hosted a small macro dinner last night with some PMs and a hedge fund CIO and while May 9, 2024, isn’t the spiciest date ever to host a macro dinner given low vol and somewhat meh macro narratives, there were some useful takeaways.
Some disagreement on Fed and inflation. But within a narrow band. Attendees saw between 1 and 3 Fed cuts this year, with inflation dropping either a bit or a lot. No recession, no mega reacceleration. As such, everyone sees the various paths as bullish for stocks because the only way stocks sell off is if we either get a recession or a rapid reacceleration in prices.
No strong view on the USD. Cyclical factors driving the dollar look to be near their peak, but with low levels of volatility the carry is still too high for aggressive bets on a lower USD.
The US election is hard to handicap because a Trump victory is bullish USD via tariffs and bearish USD if he neuters the Fed. A Trump victory with a Blue House and Congress is seen as a completely different outcome than a Republican sweep. The sweep is the most unhinged outcome. Several people at the dinner think Trump’s odds are way above 50%.
What about Jeo? I think it’s interesting that everyone spends time game-planning a Trump victory, but nobody talks about the trades to do if Biden wins. If Biden wins, there could be a major fiscal drag trade as he’s unlikely to renew the TCJA.
A Biden victory is also likely to be bearish vol and bearish USDMXN as the status quo should be kind to the peso. While you can argue that Trump wrote USMCA and thus he might leave Mexico alone, consensus was that a) he wants to severely limit Chinese backdoor exports through Mexico and b) USMCA comes up for review July 1, 2026, and Trump will likely make life difficult for Mexico going into the review. Read a full explanation of the review here.
Other topics discussed were a) USDCNH (nobody thinks a deval is coming—it makes no sense in a world where China exports are fine, and they are targeting a stronger consumer and overall financial stability, b) USDTRY there is some interest in options structures that capture the carry if spot sits here, c) HRV biofeedback, and d) lamb.
Ahead of the dinner, I also conducted a broader survey of the readership. Here are the results:
The final two questions were: What is your favorite FX trade now until July 31, 2024? And: Where will the S&P 500 close on July 31, 2024?
The FX trade answers were mixed. Most popular were: Long USDCNH USDCHF USDJPY USDCAD, long AUDUSD, EURUSD and GBPUSD, and a few short USDJPYs in there too. No consensus whatsoever. One guy answered BTCUSD.
And here’s the S&P survey result. Strong bullish lean, just like the dinner. A huge majority is bullish stocks.
Here is this week’s 14-word stock market summary:
Stocks leap back near the ATH. CPI is the key.
For the last two weeks, I have been writing about how it looks like US consumer demand is softening. Yields were on board with my thesis for a bit, but they stalled this week and traded a boring range around 4.50%.
The price of oil is an important driver of headline and even core inflation, and so it makes sense that bonds yields would go up and down with the price of oil. Obviously, there are other drivers of inflation, but oil (and gasoline) prices are observable on a daily basis and are a key input. The last big turn in oil happened about a month before the big turn in yields. I lean towards the same thing happening again.
I see many reasons to bet on lower yields now given my economic prognosis, the skew of the Fed’s reaction function, and current pricing. We came into the year pricing 6 or 7 cuts and now the modal expectation is zero cuts. We could easily get back to pricing 3 Fed cuts by December 2024 with a bit of luck.
Trading currencies for a living is quite the regime-sensitive occupation. Sometimes, it’s awesome. And sometimes you have to wait for it to get awesome again. This is one of the waiting for it times. The USD is a mixed bag, the MOF is back in hiding, commodity currencies aren’t commodity currencies anymore and correlation is low.
When volatility is low, correlation tends to be low. That’s something you can count on. Just thought I’d mention that in case you were not aware.
If you are curious why commodity currencies are not trading with commodities anymore, check out this piece.
Often when there are no strong narratives in FX land, you can at least make money trading the events. The problem is that everyone knows this and so recently there has been a disproportionate focus on trading economic events, especially from pod-based hedge funds.
This can lead to outcomes like this one:
If you look at the green line sloping downward, that marks the first few days of the week, where everyone was setting up for a dovish Bank of England meeting on Thursday. Then, the meeting happened and… It was dovish! Rather dovish!
But look at the zoomed in portion on the right. GBPUSD was down for about 5 minutes then started grinding up as shorts covered. Then whoosh. Back to unch. Most of the shorts would have covered around flat P&L and been like “Why didn’t I buy at the lows!??!”
You didn’t cover at the lows because you don’t have a binocular-like device that allows you to look into the future. That’s why.
We got Sol Ehrlich on the mic this week as he loves crypto more than I love my children.
Sol’s section starts here.
In my last contribution to FSR, I was bullish on the ETF launch, and skeptical of a “sell the news”, style event. I was wrong in the sense that we dipped after, but staying long after the launch was ultimately the correct move. I hinted that the halving would be the real “sell the news” event, but most of the selling took place leading up to it, so that was wrong.
I assess BTC price by looking at the technicals, ETF flows, and risk appetite. Brent has covered the macro, so I will focus on the first two.
Technicals
We bounced off the 21-week EMA last week, and retested the 100-day this week. Both have been historical lines in the sand in past bull markets. See chart showing the big run ups in 2017 and 2021 and how they held the EMA:
We are currently right at the level, hanging on to the 100D MA by a thread. See here:
Furthermore, each move upward in this bull market has been preceded by a false break of the range low. Holding these levels would be very bullish.
See chart:
Therefore, I consider 61k as an important retest level for this theory to hold. If we revisit the 56-58k levels, the previous price fractals would no longer be valid, and we’d lose the 100D SMA and the bull market support band (the 20w SMA/21w EMA). This would not be bullish behavior.
ETF Flows
While ETF flows peaked the same day as NASDAQ, there is some reason to believe that this trend is reversing based on the last week of data. Albeit, one week is not a significant amount of data, and it’s currently a lagging indicator.
See chart from The Block:
And these charts from Eric Balchunas: https://twitter.com/EricBalchunas/status/1787468690583081214
I will also make a note that this is a very difficult trade for me to make psychologically. There isn’t much of a short-term macro thesis, the market has been choppy, and I don’t really see a catalyst for an upward move (unless you consider FTX money re-entering market, which I’m skeptical of). But I think the technical Risk:Reward is nice if we’ve found a local bottom, so I’m long.
Sol’s section ends here.
If you care about commodities, you should subscribe to this Substack. The author, JJ, has more experience trading commodities than Drake has experience being dissed. JJ is the real deal, straight out of the old school commodity trading pit. His latest writeup presents some interesting factoids about silver and he covers oil, gold, and all that just about every day. If you want a serious commodity expert, he’s your guy.
In contrast, here’s my analysis of commodities this week:
Silver, you crazy.
OK! That was 10 minutes. Next week’s will be shorter, I super duper promise.
Get rich or have fun trying.
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Music
A beautiful rendition of one of the most beautiful songs ever written
He used to do surgery
For girls in the eighties
But gravity always wins
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It’s not so much the “WHY?” as the “WHAT?” that matters most in markets. Keep your eyes peeled for good news / bad price setups.
Taking profit on the USDJPY and looking for a way to get short GBPUSD for corporate month end.
