Read on the Trading Floor - 15 Nov 2023
Today’s focus… More cuts? More Issuance?
Macro Themes At Play
Theme 1 - Climbing the wall of worry
It’s been a spectacular cross asset rise in November …
What was once feared to be a regional war, the land incursion has been isolated (to date) in Gaza between Israeli troops and Hamas.
Despite elevated inflation expectations, hard data continues to deliver good news for the Fed
Oil - pressure is off, the fear of $115/125 by year end has rescinded
Supply - QRA wasn’t as bad as feared (Yellen managed the market risks well)
US shutdown averted - Johnson manages to deliver what McCarthy couldn’t.
UAW strike ends - impact on US growth profile averted, areas like Detroit getting a huge income boost.
Chinese data stabilising … retail sales / IP both beat overnight.
Combine that with negative positioning and here we’re, Fed won't hike in Dec, we've reached global peak rates, 2024 previews dominated by a bond market rally theme, Europe is showing small signs of “growth” data bottoming and Chinese property concerns remain out of the headlines with more stimulus (>100bln) pumped into regions to support housing… any day now Budweiser Santa add will be leading us to fresh SPX highs.
Fear and Greed is only at neutral, so what can stand in the way of the Santa rally / Seasonals?
Source: Fear and Greed Index - Investor Sentiment | CNN
As we’ve said previously … Fed’s message has to change if they're to do the heavy lifting. 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.
With 4 cuts now priced into SFRZ3Z4 .. paid here vs a short USD basket offers a decent “hedge” to a long risk portfolio if indeed Powell was to morph into the Xmas grinch. Unless something breaks, how many more cuts can we get next year?
WIRP US
Source Bloomberg
SFRZ3Z4 = Higher for longer trade
Source Bloomberg
Theme 2 - How far can fixed income rally? Will we see 5.0% before 4.0%?
As the dust settles on CPI’s goldilock reaction, the most important thing to consider is lower fixed income vol can support equity price action. However “expecting” a 4% print without a deterioration in economic data looks difficult given the supply in 2024. @Tavicosta tweet via The Daily Chartbook illustrates the historic wave of issuance that is due in 2024… 3.5x times this year!!!! Furthermore, the QRA is based on how the economy performs, if tax revenues disappoint as a result of a mild recession, its going to be difficult not to come to the market for more... After-all they issued a lot more in 2023 than they had forecast.
Theme 3 - 2024 previews keep landing in Harkster.com
TKer by Sam Ro - Goldman Sachs says to 'follow Taylor Swift's advice' in 2024
Morgan Stanley - FX Pass-Through Needed In Europe
Goldman Sachs - Why the global economy and markets can continue to outperform in 2024
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Steno Research - 5 things we watch: Trump, Electricity, CPI, Crude Oil, Fixed Income
FT - Labour’s Starmer facing front bench revolt over Gaza ceasefire vote
FirstTrust via The BondBeat … "food prices have now risen thirty-nine months in a row and are up 24% since before COVID, owing to the significant money creation over the last few years"
James Picerno - 10year UST Yield ‘Fair Value’
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Thanks for the shoutout! Great stuff as always!