Read on the Trading Floor - 14 Nov 2023

Today’s focus… Inflation, cuts, higher for longer, who’s left to do the heavy lifting?

Macro Themes At Play

Theme 1 - Santa Claus is coming...

As soon as the last firework popped for Halloween, football matches have been interrupted by Christmas ads, Mariah Carey has dominated the radio waves, the cups in your favourite coffee shop have changed and like clockwork, ESA has rallied over 7% in Nov as the Santa rally appears. Despite a long list of concerns... "Fed making a mistake, Government shutdown risks, US ratings downgrades, China deflationary spiral, China selling Treasuries, CRE maturity wall, geopolitical tensions in the middle east, earnings warnings, consumer frailties, consumer's spending down their covid savings, etc …” The Santa Claus rally is undefeated and is soaring as FCI soften across the board ... 

Theme 2 - Which Inflation number does the Fed watch?

1. Headline CPI

2. Core CPI

3. Super Core CPI 

4. PCE

5. Inflation Expectations 

What's interesting over the past week to 10 days, is the hard data (1-4) is making progress in the right direction for the Fed. For example, today's Super Core MoM came in at a benign 0.2% but that comes quite quickly on the back of last week's elevated inflation expectations in US (Bloomberg - US Consumer Long-Term Inflation Expectations Reach 12-Year High). 

I will leave it to the experts to discuss the intricacies of today's data set... 

• Steno Research - US CPI Reaction Nugget: Further fuel for the market rally

• Saxo Market Call - Fixed-income: Inflation expectations, views on yields, Moody's US rating outlook

• ING - US inflation slowdown has much more to go

• MacroVisor - What does today's CPI mean for the Fed?

• Inflation Guy - Summary of My Post-CPI Tweets

Theme 3 - who's left to do the heavy lifting now....?

The market is only now focused on cuts, unwinding the move seen last week on the back of the higher inflation expectations prints. Swaps now price in 50bps of rate cuts for July policy meeting next year. 

Source Bloomberg

Ever since the Fed added "tightening financial conditions" it top ticked the high in FCI indices and we've only softened since, with the last leg driven by a 2-3 std dev move in assets from equities through to the USD.   

However, rhetoric has remained the same from the board as SPX rallies over 7% since their meeting. Team Transitory has morphed into Team Higher For longer. Is their message out of sync with the transition to a lower inflation regime, or are they going to be now forced to say they will hike in Dec to tame the rally monkey, stop inflation expectations / wage agreements spiralling higher into 2024. Either way, the tsunami of Fed speak over the past week or two isn't working, for the market to listen, the message has to change. 

• Reuters - Fed's Jefferson: Inflation uncertainty can warrant stronger response

• Bloomberg - Fed’s Barkin Says US Inflation Isn’t on Smooth Glide Path to 2%

Theme 4 -  Washington

Johnson is negotiating to try and kick the "debt ceiling" debate into the new year. From an extremely wet London, it doesn't seem like much has changed, like his predecessor, he's asking Dems for help and is dependent on support from the Freedom Caucus. Good luck threading the needle!!!!

• Axios - Mike Johnson channels McCarthy to avoid a government shutdown

• Axios - Mike Johnson's shutdown plan gets a hall pass from furious Freedom Caucus

• Politico Playbook - Johnson gets by with a little help from some Dems

• Bloomberg - GOP’s Johnson Turns to Democrats to Pass Plan to Avert Shutdown

With the street presuming the POTUS election will be Biden vs Trump 2.0, keep an eye on Haley's momentum in the polls. The market will be interested in the Dimon economy "chat" especially given the belief he has favoured Dem nominees in the past.

• Axios - Nikki Haley, Jamie Dimon talk privately on global economy

• Steno Research - Great Game - 3 reasons why trump will win and 1 reason he won't

Theme 5 - What does Cameron offer Sunak? 

Moving away from the right of the Conservative party and back to the centre is a surprising and potentially last roll of the dice for Sunak. They're now competing in Keir Starmer's turf. Gone are the election gains from "completing Brexit" that delivered a historic victory for Johnson over Corbyn, now the leadership of the Conservative party is looking to win back the centrist voter (and potentially those that do not want to pay VAT on their school fees). Odds of a Sunak PM'ship have increased following the cabinet reshuffle although Labour remains clear favourites. 

• FT - Rishi Sunak offers up Cameron 2.0 to woo back Tory voters

• Politico - Cameron gets his feet under the Cabinet table

• The Rest is Politics - Braverman sacked and Cameron returns

• Oddschecker - Next Conservative Leader Odds: Suella Braverman backed to replace Rishi Sunak

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