Stalled

January 30, 2023

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Stalled

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FX remains in a holding pattern as we enter a huge week. The China reopening + global soft landing trade has stalled, but pullbacks are minimal and it’s been hard to make money long or short the China reopening proxies such as oil, AUD, and copper in the past two weeks. Those three markets have all been range trading with a very mild upward bias since mid-January. Meanwhile, the Hang Seng Index, which has been the leader of the pack, made a bit of an ominous move last night as it dropped 2.7%, failing right at the major 22500/22700 pivot.

Hang Seng Index fails at major pivot

The market is plenty loaded up on the China reopening / world soft landing trade at this point and the question is whether there are enough buyers left (or more good news coming) to take us another leg higher. The 2023 rally in all things hated has been swift and aggressive and now that the weakest shorts have covered, and meaningful bullish positions are in place, we need another wave of good news to trigger another bull run in risky assets. The risk is, the news comes in mixed and we mean revert.

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Packed calendar

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Here’s what’s happening this week:

A little something for everyone. We also get month-end madness tomorrow on top of all those economic events. The market is ready for modest improvement in the sentiment data and a continued run of solid jobs data. China PMIs tonight could be modestly interesting as we see what sort of sentiment pop is realized following the sudden stop of COVID-zero.

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Fed

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It’s kind of a strange setup with the Fed right now as their mantra is “higher for longer” but the market simply does not believe them. This makes the event hard to trade because it’s difficult to envision what Powell & Co. can say that will be meaningfully hawkish. Of course they will reiterate a message that implies they are going to keep rates on hold for most or all of 2023. But if the market doesn’t believe that, can you trade it?

This is the issue with trading right now. The market is trading themes that won’t be confirmed or disproven for months.

• Will inflation drop back towards 2% as markets expect? We won’t know for months. We know the top is in for inflation, but where is the floor?
• Will the Fed stay true to its word and keep rates in restrictive territory, even as inflation falls? We won’t know for months.
• Will the China reopening provide a boost to global growth and offset weakness in soft data around the rest of the world? We won’t know for months.

Unless the Fed hikes 50bps on Wednesday or issues some sort of formal forward guidance linked to economic outcomes (like the old 6.5% UR threshold back in the day)… It kind of feels like their bloviating is irrelevant. The standoff between the Fed and the market will not be resolved this week, barring an aggressive change of tactics from the Fed.

Perhaps the hardest question to answer right now with regard to the Fed is: Do they actually care about financial conditions? In the FOMC minutes following the Fed’s last meeting (13/14DEC 2022), they said:

Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.

And here is a look at FCI since that meeting. Back to early or mid-2022 levels, depending on which index you use.

Bloomberg and Goldman Sachs financial conditions indexes

It is easy for the Fed to target financial conditions when conditions are tightening. But when financial conditions loosen like this, the Fed probably just licks their lips and feels more confident they can achieve the soft landing. They might talk about “unwarranted easing in financial conditions” but there isn’t much evidence they have the backbone to directly confront the market and rip FCI tighter. A 50bp hike would certainly do much to increase their credibility on that front but even if that’s what Powell might dream of doing, the committee will probably not get on board for that.

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Final Thoughts

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The bitcoin chart looks a bit like the Hang Seng chart on page 1.

BTC got to 24000, just shy of the 25100/25400 pivot. This is another reason for caution on risky assets.

With so many scenarios in play this year (no landing, soft landing, recession lite, hard landing, crash landing)… I don’t think the market is all that likely to land on the correct answer in the first weeks of 2023. Unlike 2022, which was a clear, one-way narrative (Fed on auto-pilot, tightening into a bubble)… 2023 is much less clear.

Failures in BTC and Hang Seng are technical warnings signs that these early 2022 halcyon vibes may not last all year.

Bitcoin daily chart back to early 2022

Have a speedy day.

good luck ⇅ be nimble

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Source

Florida highway patrol distribution of speeding tickets.

They tend to give a lot of tickets for 9mph over,

just below the threshold where the fine jumps.

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