Read on the Trading Floor - 11 Mar 2024
Today’s focus… US CPI
Macro Themes At Play
Theme 1 - US CPI looms on the horizon
Another day of patience as the mkt waits for a crucial US CPI print. Leaders of the recent rally have consolidated after a wave of profit taking hit the likes of Nvidia and of course Nikkei (Brent Donnelly am/FX - Sus). Both having breached key technical thresholds only to quickly revert, in particular Nikkei showing signs of exhaustion following its clear break of 40k only to now be back below the previous record high of 38,957. A doji for SPX and an absence of bears on fintwit makes for an interesting setup, however this may all be just a wave of position squaring ahead of an uncertain CPI event rather than definitely a "top" or turning point in the excessive FCI loosening we've seen since the dovish Fed pivot (Hindsight Capital the best performing fund on the street).
"Understanding" and/or reverse engineering the January spike in OER has been the defining proponent of previews for this week's CPI release. The BLS’s re-weighting was a key driver of the substantial Jan surprise. For example, Pepperstone have indicated that "single-family detached homes now having a higher weight in the OER index, and rent inflation here outpacing that of other housing categories". The risk is OER is likely to remain elevated for some time, somewhat underpinning the core CPI metric
Axios - Why there's so much confusion over housing inflation
Pepperstone - February 2024 US CPI Preview: The Final Piece Of The Pre-FOMC Data Jigsaw
Steno Research - US INFLATION WATCH: OER A ONE-OFF?
Scenario 1 - Immaculate disinflation
Very difficult to see the market repricing May aggressively, maybe we see a nod to May, but June will continue to anchor the Fed curve. This is where their communique has guided us and "one print" should not aggressively change the markets probabilistic outcomes for H2 2024. In effect, one soft number should not give them the “confidence” they need to declare comfort in knowing CPI will be soon back below target.
The first move on an inline to softer number will be positive for risk sentiment... gold, copper, spx, US2s and weigh on the USD, what will be more interesting if this move does not stick and provides greater evidence (doji's etc) that the technical momentum is waning. Remember highs are printed on good news, not bad. As a result, @HarksterHQ will be waiting to see which moves stick once option XXXXX have been cleared!!!!
Scenario 2 - Fed policy isn't restrictive enough, "higher for longer"
Are we certain the Fed will cut 3 times this year? Powell indicated they're "not far" from the first cut but another hot CPI print and the market will have to focus on the March SEP dot plot remarking higher to 50bps of easing in 2024. It will only take 2 policymakers adjusting their plot higher to flip to a median of 75bps back to 50bps. Furthermore, keep an eye on the 3-to-6-month annualised rates, this is where the Fed will look for the underlying trend direction to give them confidence that we're indeed heading back sub 2%.
Apollo have been working hard on the "no cuts in 2024" trade and with assets "bubbling", it's hard not to believe the case for a "meaningful" easing cycle in US has weakened materially as labour market remains historically strong, wealth impact of crypto/stocks supports the economy as well as household equity gains post covid and the 5% being paid out on UST .... Are we mapping the 70s cycle tick for tick?
Source Apollo's Torsten Slok
Further reading for your CPI prep
Bloomberg - Traders Are on Alert for a Hotter-Than-Expected Inflation Print
Bloomberg - Barclays Says Sell US Treasuries After ‘Excessive’ Bond Rally
Apollo Academy - Is the Fed Done Fighting Inflation?
Liberty Street Economics - Expectations and the Final Mile of Disinflation
Pinecone Weekly Brief - Inflation Aint Dead Yet
The Inflation Guy / Mike Ashton - Live Long and Prosper with Inflation-Linked Annuities
Axios - Why there's so much confusion over housing inflation
Source: Tradingeconomics.com
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