Friday

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I think the weak soft data will soon rally to catch up with the strong hard data (the exact opposite of what the market has been expecting).

by Brent Donnelly

January 19, 2024

Current Views

Long EURSEK @ 11.26

Stop loss 11.1440

January 19, 2024

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Friday

The US hard data continues to defy the soft data and this week was as clear of an example as you could get. Empire State had a fat finger at -43.7 while Retail Sales show continued strength in the US consumer, Initial Claims are pretty much at the all-time lows, housing starts gave back very little of last month’s surge, and building permits beat. Home prices have stabilized at extremely high levels and financial conditions are loose. 2024 is going to be an interesting one for the housing market.

I am thinking the soft data will just end up catching up to the hard data as inflation comes down and the angst from rising prices finally dissipates. Furthermore (as Dave G and Sam Rines have been mentioning of late) because a majority of businessmen are Republicans in the US, the rise of Trump’s win probability will probably lead to a major boost for business sentiment over the next 6 months. I would not be short any consumer confidence or business confidence number from here on in.

For context, here are the political donations from NFIB members. It’s closer to a political organization than a business organization. While I cannot find any information on ISM survey respondents’ political affiliations, I could guess!

There are 437 reasons to ignore soft data, but if you just can’t bring yourself to ignore it, it’s sensible to position for better sentiment data going forward. The old thing used to be to watch the soft data and assume the hard data would follow. I think the new way is to play the soft data catching up to the hard data.

Today’s Michigan sentiment data is not included in my theory because Trump’s surge began 17JAN and therefore I’m only talking about data released after that. But still, stocks are up, gasoline is cheap, inflation is tolerable. What’s not to like?

Remember this meme that went around when Powell was nominated?

It worked! We have been fooled by randomness!

Calendar

Thursday!

Quick summary of views

Out of the AUD short at 0.6560ish, no view there. EURSEK I still like higher. US yields and USDJPY higher as the level of yields and market pricing made no sense with 10s at 3.90 and probably still makes no sense here. It’s all just so much like 2023 so far. Market too dovish, market is too bearish stocks, carry is king, etc. etc.

Not much stands out on the calendar next week. I suppose there’s a tiny delta of a BOJ surprise as this is one of the first meetings with no expectations going in. BoC and ECB I don’t think will be particularly exciting. Of everything on that board, maybe NZ CPI has the greatest chance of generating volatility as a rapid fall in inflation in NZ would put the RBNZ quite offside in terms of real rates. CPI is scheduled to come in at 4.7% vs. 5.5% cash rate compared to Oz where CPI is similar and the cash rate is 4.35%.

Ben Hicks (options expert at Spectra FX) points out there could be some interesting options trades in USDMXN from here because the rise in Trump’s odds will probably reduce demand for MXN carry strategies as markets worry a bit about some kind of right tail but at the same time, the carry is juicy and the election is still 10 months away. This could keep USDMXN in a range as the narrative crosswinds blow back and forth. RKOs and/or DNTs are interesting if you’re into that kind of thing.

Final Thoughts

The bullwhip effect remains in full force across the auto industry as the automotive short squeeze in 2021 has now left Ford and Tesla holding the bag. There’s a glut.

7:38 a.m. today: *FORD CUTS F-150 EV LIGHTNING PRODUCTION

18JAN https://www.investors.com/news/tesla-stock-ev-giant-prices-are-inverting-why-thats-a-bad-sign/

May the large, muscular cats of the genus Panthera defeat the daring, adventurous and sometimes reckless Spanish-American pirates of Tampa Bay.