Tomorrow’s CPI has less relevance than usual. Markets are intoxicated.
This brief text exchange with my wife captures so many things: Paradox of choice, decision fatigue, hyperabundance, virtue signalling, the nostalgia effect, bounded rationality, and more.
12DEC 109 / 107.50 CADJPY put spread
risking 48bps off 109.70 spot
First up, while CPI was a 2/10 during Secular Stagnation, then went to 10/10 importance during Biden’s Great Inflation, it’s back down to 4/10 now. Tomorrow’s release is particularly low in relevance as it’s backward looking ahead of a possible litany of important policy changes that could directly impact future inflation.
Normally, monthly CPI prints are a good guide for where we are and might be going, but tomorrow’s print: less so. The market will move on it, of course, because that’s what markets do, but the only outcome that would really move the needle for macro would be a huge topside beat. That would put the December cut in jeopardy and set the starting point for Trumpflation risk at a higher level. The December FOMC is currently priced around 65% for a cut.
The May/June/July prints were low, but we are back into a period where monthly 0.3s are the norm, and so the inflation problem that started in 2021 is still not fully solved.
10-year breakevens are trading accordingly after a massive rejection of the August collapse, and while we’re still in familiar territory, it’s worth keeping an eye on the 2.50% level.
We are in one of those periods where it feels stupid to even think about thinking about being bearish stocks, as the election has brought out mad animal spirits across the board. I am moving some money out of stocks and into cash in my retirement and education plans as I think the euphoria is getting a bit scary. While I can’t think of a single reason to be short stocks, I can think of many reasons to take some money off the table.
One: today feels a bit like this:
Two: the Nikkei has failed to confirm the rally. Similar to the 2021 peak. I acknowledge that this could simply because tax rates are presumed to be going down in the US and not Japan. But still.
Three: Again, yes, a good part of the animal spirits in the US are idiosyncratic due to expectations of lower taxes and thus higher valuations for US equities, but it’s still a bit disturbing that commodities are not participating.
Stock market seasonality is incredibly bullish now until the end of the year but positioning probably offsets that somewhat. Retail was already max bullish before the election, and now the CTAs and vol-targeters have had a week to pile in—so here we are. Ultimately, my view is mostly a gut feel that the market is in a frenzied state of ecstatic intoxication right now. Fearful when others are greedy, yadda, yadda. What will ultimately cause a correction in equities? I don’t know.
A chart to ponder: Total market cap of crypto touched the ATH of $3T last night and reversed a bit.
And bitcoin just matched the total value of all silver in the world ($1.7T). Interesting.
Have a hyperabundant day.
Top of the Range
Hi. Welcome to this week’s report. The post-Trump euphoria trade continues at full speed, though there are some mild signs of exhaustion here and there.
A dominant feature of the FX landscape over the past two years has been the rangebound action in the dollar. We have been in a precise 7% range for 24 months now. After the USD came off the boil at the end of the 2022 rate hike cycle, the DXY entered a 100 / 107 range and has been there ever since. The topline positioning number in our report tends to oscillate in a -5/+5 range, despite having a maximum outer bound of -10/+10 because the figure is an average of various inputs and all the inputs never go to 10 all at once. As such, a 4 or 5 is extreme, as you can see in this chart.
This does not mean that the USD must peak right now. Positioning during a trend will get extended in the direction of the trend and stay extended for long periods as the security trends. But if the security is rangebound, the moment you get to the extreme in positioning, it signals a reversal. Therefore, you have to make the call here whether the USD is still rangebound, or it’s about to break through and finally start trending. Given the uncertainty on tariff timing, tax cuts, and government restructuring, this is certainly not a bad place to take some long USD chips off the table.
Thanks for reading.
https://thedecisionlab.com/reference-guide/economics/the-paradox-of-choice
We make around 227 decisions each day about food.
That feels like a lot.
The NASDAQ almost got there, then fell off
