In this week's Macro Insight I discussed...
Equities ripped higher last week on lower then expected US CPI numbers and an emerging Goldilocks narrative suggesting that inflation can cool amidst a soft landing.
Commodities gave back their gains over the weekend after poor Chinese economic data re-ignited demand concerns.
BEAR MARKET OVER?
Bears have been getting their faces ripped off as “non- fundamental” buying from CTAs, Vol target, Retail and corporate buybacks overwhelms the sellers. Many hedge funds have been throwing in the towel on shorts as Goldmans point out massive de-risking from their Prime flows.
Goldmans Prime desk called it the 3rd largest hedge fund short covering event in the last decade.
JPM Prime huge increase in L/S net leverage – people getting stopped back in.
Sentiment indicator back toward average of this year.
SOFT LANDING UNLIKELY
Sure, inflation missed but it’s early days and with core CPI still up 0.3% MoM and rent of shelter at highs, we need more data to confirm that the pressure is off the FED.
Credit impulse would suggest that a soft landing is not likely according to MacroAlf’s numbers.
FINANCIAL CONDITIONS SAME AS MAY
The FEDs conundrum is evident in the chart on financial conditions.
Two 75bps rate hikes and nothing has changed.
Equity forward PEs are normally anchored to real rates and have started to diverge.
SPX PRICE ACTION
Markets consolidated ahead of CPI last week after hawkish FED speakers had tried to counteract the dovish rates moves and NFP had come out strong taking September hike probability back to 70%.
VIX AND SPX SKEW
VVIX has also had a nice bounce as VIX accelerated lower breaking 20% last week, we have closed out our Aug VIX 22 puts and we can see similar flows in the markets from open interest changes.
The acceleration higher in SPX late on Friday through 4250 did not take VIX any lower, this was the first sign that we may be reaching exhaustion in the vol selloff.
USDJPY CHEAPER VOL TO BUY THAN BONDS
Vols also lower across FX majors, with carry flat to negative across the board, especially in USDJPY, which as been acting like a US rates proxy as we flagged last week.
We continue to see FX vols as a good own but would caution that realised can go through periods of low single digits in a news vacuum that we may be heading into for the rest of August.
Filmed on on Tuesday 16th August 2022.
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