Read on the Trading Floor - 17 Nov 2023
Today’s focus… Fed pivot trades if the data softens….
Macro Themes At Play
Theme 1 - Will the ECB or Fed cut by 100bps in 2024?
Why is the market expecting 100bps from both the Fed and ECB given the much weaker starting point for the European economy relative to the US and especially when you consider the high likelihood that Dems will have a fiscal giveaway in an election year. Isn't the ECB more likely to match market pricing than the Fed? With 4 cuts now priced into SFRZ4... paid here vs a short USD portfolio offers a decent “hedge” to an aggressive turn in Fed Speak and/or an improvement in US data.
Bloomberg - ECB Interest Rate Cuts Next Year Coming Next Year, Traders Bet
Econostream - Must Not Loosen Policy Until Certain of Price Stability
Econostream - ECB’s Holzmann: Second Quarter of 2024 ‘a Bit Soon’ to Expect a First Rate Cut
SFRZ3 vs ERZ4 (with BoE SFIZ4 added for fun)
Source Bloomberg
Theme 2 - US Recession Watch and Investing in the Pivot
As soon as Nick told us that the Fed are done hiking (WSJ - Cooling Inflation Likely Ends Fed Rate Hikes), 2023 has replicated Q4 2022 as US data softens after a stellar Q3. Citi Surprise Index rolling over, continuing claims rising, UER rising, labour market signalling pre-recession signals (but don't use the Sahm indicator)....
ZeroHedge - Price Shock-Risk Rises As Markets & Economy Diverge
The Last Bear Standing - Playing the Pivot
USDJPY rolling over with US10s a clear recession bet by the street
Source Bloomberg
Theme 3 - but haven't we played this game before; 7th time is different?
John Authers Bloomberg piece (Soft Landing: Bond Markets Turn and Turn, But There's No Pivot) highlights some interesting nuggets from across the street, none more so than Henry Allen (DB) who has identified "seven attempts by the market to take yields down in response to a Fed pivot in the last two years. All of the first six proved not to be pivotal."
Furthermore, John Authers goes on to argue that if "we say a soft landing is a period of rising rates that doesn’t lead to even a quarter of negative economic growth, then there has been precisely one in the post-Volcker era. That came in the mid-1990s, after the Fed under Alan Greenspan hiked unexpectedly hard in 1994, created a brief but brutal bond bear market, and sparked a series of credit and devaluation crises in the emerging markets. In the US, however, growth never went negative"
Theme 4 - AI is it a bubble?
GS make some excellent points as too why it is not (Why AI stocks aren’t in a bubble) but two things look excessive in the markets today.
#1. Is the aggressive re-pricing of the Fed which needs the data in the coming weeks to endorse it. Otherwise like in Sept and the previous attempts to call for peak Fed pricing, we will have a sell off / push back against the cuts priced into 2024.
#2. The other is the religious like positioning in MAG7 ... I am no equity expert, and maybe AI productivity gains are different not to mention the 5% some of these firms are earning on their cash parked in money market funds but the charts and exposure flagged by Markets & Mayhem are insane. If you’re chasing performance into year end, do you want to be the last one in.... what could go wrong? Nvidia’s earnings next week will be spicy….
Theme 5 - Holiday shortened week
.... but there are still a few events of interest #1. Durable Goods, #2. Nvidia earnings, #3. UK Autumn Budget, #4. Riksbank, #5. Japan CPI and #6. the Lions are watchable
Newsquawk - Week Ahead 20-24th November
Nomura - The Week Ahead – FOMC Minutes, UK Autumn Statement, Japan CPI and Riksbank Policy Decision
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How about those Lions ????
Makes you wanna believe Miracles can happen.......
The Soft Landing Miracle ?????