SignalPlus's Podcast: Recent Episodes
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Good morning friends and welcome to SignalPlus's daily macro commentary.
The big main event in the week didn't disappoint, with the CPI release jolting cross assets into a big rally with headling coming in at 8.5% yoy and core at 5.9%, both weaker than expectations.
US equity markets show up between 2-3% in the main indexes, with Materials and Tech leading the way higher. It was pretty much a classic case of risk-on across the board.
Bonds also screamed with 2s rallying about 20bp, 10s about 10bp in a large bullish steepener reversal. The 10y auction also came in strong with the clearing yield coming in at about -0.6bp through the 1pm screens with a 2.5x bid to cover. This was the highest bid to cover and first through-bid auction seen since February.
Equity VIX breached 20% for the first time since Apr in further signs of a bearish capitulation as underweight investors were forced back into risk assets.
Crypto assets saw a similar across the board rally higher with ETH leading the way. IV in general drops significantly (5-8 vol) after the number, while ETH Sep-Dec vol remains relatively bid on the uncertainty of upgrades, we think ETH is more likely to continue to trend higher into Sep. Besides, a number of algo-stablecoin tokens also performed well this week as concerns about USDC and regulatory sanctions continue to weigh on the market.
Beneath all the euphoria, it is interesting to note that the underlying CPI components were not as weak as the headline suggested. The soft print was driven largely by airline fares, hotel lodging, and used car prices that are historically volatile and items that the Fed will likely discount somewhat. On the other hand, shelter inflation and rents continue to see strong gains which are consistent with strong consumer demand and tight labour markets, which is something the Fed WILL likely focus more on in their ongoing inflation analysis.
In fact, towards the NY close, Minneapolis Federal President Kashkari stated “The Fed is far away from declaring victory on inflation" and the idea the Fed starts cutting next year is "unrealistic". While the market has largely ignored it, we would caution against concluding that the Fed has committed to a full pivot, and that we would expect Fed rhetoric to remain on the hawkish side considering how much financial conditions have eased on the DXY and markets side.
With that said, from a trading perspective, pain trade remains higher as many investors remained underweight due to "fundamentals" or valuation concerns. Talks of CTA buying in SPX above the 4200-4300 area also surfacing, and we expect the rest of August to be largely driven off positioning, which could mean a lot of painful and choppy moves both ways as liquidity shrinks into the end of summer.
Good luck and good trading everyone!