Signs, Signs

Canaries, they be dyin’

Interesting couple of days coming up with CPI presumed to be weak and then FOMC seeing some potential variance with 2 banks out of 11 we track calling for the median dot to go to just 1 cut with the other 9 banks expecting dots to show 2 cuts for 2024.

While the bar for me to be bearish equities is very high, the warning signs for equities are stacking up. I’m bearish now.

• Carry is unwinding all over the place. Mexico, Italy, France, etc. are seeing risk premium added after months or years of compression.
• More micro: Crypto is losing steam after multiple attempts to make new all-time highs following the ETH ETF approval. Is an ETH ETF that doesn’t pay a yield worth buying? Hmm.

• GME aborts mission to moon. The memestock mania of 2021 is now a shadow of its former self as a much-less-relatable Keith Gill runs into a much more cynical crowd who are no longer rallying behind some libertarian fever dream; they’re just trying to monetize his shenanigans. No diamond hands anymore, just a bunch of people buying the rumor and selling the fact. GME traded at $38 at exactly 12:00:00 on the day of the livestream, went straight to $29 and is now at risk of pinning the Kitty’s $21 strike (21JUN24).
• Behavioral stuff abounds with Jensen Huang achieving “Taylor Swift of Tech” celebrity status (and looking overconfident?) and fawning media coverage reminiscent of Cathie Wood’s deification at the peak of the 2021 bubble.
• More: South Park is touting NVO, copper trades like lead, Shanghai is rolling over as China’s housing bailout is stimmy dud #748, LATAM equities are getting destroyed (Mexico down 14% YTD, Brazil down 18% YTD in currency terms) and still, VIX is bumping along 12/13.

Tactics are tricky with CPI and FOMC coming out, so my view is either buy some wingy 2-week puts in NASDAQ or scale in to shorts before and after CPI with the idea that the market will sell the rally on a weak figure and sell hard on a strong figure. Or both. Not investment advice; please trade your own view.

This is a tactical correction view, looking for a quick move to 18,200 in NQ over the next week or two.

---

Fed

Here’s a quick FOMC Preview, courtesy of Adam Maltz.

• 2024 has 37bp of cuts priced, less than the 50bp of cuts estimated by most banks for 2024 Dots.
• Fed officials expected three 25bp rate cuts in December 2023 and March 2024, but the revisions upward to inflation and “higher for longer” rhetoric mean the 2024 median “dot” is likely to rise. It only takes one dot moving higher to shift the median up to two 25bp cuts which is the base case.
• BNP’s assessment of where Fed officials will reside in the June dot plot is for the thinnest of majorities for the two-cut camp, whose ranks may include Powell, Jefferson and Williams. BNP see three participants likely leaning toward no change in policy rates and six opting for just one rate reduction this year. The margin could be as narrow as one vote (10-9) in favor of two cuts versus one or fewer.
• Barclays and HSBC expect the updated dot plot to indicate one 25bp rate cut in 2024, bringing the median dot to 5.125% by the end of 2024. Higher dots in 2024 reflect the upward revisions to the core PCE inflation projections.

• On average banks estimate that the June SEP for 2024 PCE and Core PCE will be revised higher by 0.18% from the March meeting.
• Core PCE inflation and Supercore have moderated from elevated prints at the beginning of the year but remains to be seen if this is enough to give the FOMC confidence that a sustained return to 2% inflation is on course.
• The May employment report confirmed that the labour market remains strong. However, JOLTS numbers are sending encouraging signals that the Fed is succeeding in moderating labour demand and easing labour market conditions.

The most interesting part of the FOMC could be the dots. You can see in that table that most banks are calling for 2 cuts in the dots, but Barclays and HSBC are calling for one. It’s going to be close with the median likely to be determined by a single (or maybe 2) votes.

---

Final Thoughts

The first move in Europe was to take France wider vs. Germany. It’s now at 67bps vs. 58bps yesterday and 48bps before the weekend. As long as Europe is selling French and peripheral debt, EUR will be capped.

Have a smarter-than-expected day.

---

The Spectra FX Positioning and Momentum Report

GBP Zags Again

Hi. Welcome to this week’s report. The story in FX has been in EM carry as unwinds triggered by Mexican elections continue to ripple through various corners of the market. G10 Positioning has stabilized with the market sitting on medium-small shorts in the funding currencies, AUD, and CAD and longs in the USD and GBP. The CFTC has re-engaged long cable yet again.

Observations

The CFTC has been chasing its tail in GBPUSD for two years, as the non-commercials were short at the lows in 2022 and then twice long at the highs in 2023/2024. After zigzagging from +55k to -20k to +55k and back to -29k… The CFTC has now zagged again, up from -29k short to +43k long in six weeks. That’s chunky: 5.7 billion pounds. This makes GBP an interesting short if the USD accelerates on a strong CPI.

The UK election has so far been classified as a nothingburger by markets. This presents a risk to the pound even as polls show a growing and insurmountable lead for Labour. Policy trial balloons and wonky headlines are a risk as the July 4 election nears, because there is very little premium in the options market, and nobody is on high alert for anything. Still, the 2022 Truss debacle is fresh enough in people’s minds that a few loose lips on fiscal could sink GBP.

Nothing to do in the pound right here, right now, but the conditions for a zippy move lower are in place if a positive US or bearish UK story were to take hold.

Finally, if US CPI were to come in super soft this week, there is a ton of ammunition on the sidelines waiting to get back into MXN and BRL. Our clients mostly believe those blowups are more about unwinding large carry positions after a VAR shock, and less about structurally-worse fundamentals in LATAM.

---

From: Are Blondes Really Dumb? By Jay L Zagorsky, Ohio State University.

This study is provocative. I would guess confounding variables here. Study’s author says:

Potential Explanation: Both heredity (nature) and environment (nurture) impact intelligence. Factors such as early childhood nutrition, alcohol usage during pregnancy, levels of lead in the environment as well as genes matter in determining a person’s IQ. Stanovich (1993) asked a provocative research question “Does reading make you smarter?” His affirmative answer suggests one possibility is that blondes grew up in home environments that provided more intellectual stimulation.

This particular hypothesis can be tested using three survey questions from the NLSY79’s first survey which determined if the respondent had access to reading materials. The interviewer first asked “When you were about 14 years old, do/did you or anyone else living with you get any magazines regularly?” The question was then repeated for access to newspapers and library cards.3 The results show that white, blonde women grew up in homes with more reading material than those with other hair color. It is important to note that this does not rule out other factors as the driving reason behind the IQ differences.

good luck ⇅ be nimble