"Mental wounds not healing
Who and what's to blame?
I'm going off the rails on a crazy train."
-Ozzy Osbourne
Well, the last few days have been interesting from a macro analyst's perspective!
Late last week, we had decelerating labor data in the way of JOLTS job openings and then better than expected labor data via Non-Farm Payrolls.
Then this week on inflation, we had less dovish CPI, especially on Core Services, and across the board cooler PPI.
Finally, bam .... the FOMC meeting! The revised dot plot now signals three rate cuts in 2024. The FOMC added effectively one word to the statement : "now", and also provided updated economic projections (which I will touch on more below).
As a result, wow, did underperforming and rate sensitive assets rally. Personally, I even felt pretty smart with my position in small cap value IWN, which I had been bag holding (truth be told), up almost 4%.
But, hey, even a blind squirrel can find acorns now and again!
From the perspective of Hedgeye's asset allocation model via Macro ETFs in Portfolio Solutions, we obviously didn't get it all right. But the top largest positions were a combination of cash, short-term Treasury bills, and gold.
Clearly cash and short-term Treasury bills didn't do much, but gold sure had a day, so that was nice. GLD was up some +2.3% and AAAU (physical) gold) was up similarly, which "felt" good. Even for those of us who don't do feelings. GDX also jumped 5.9%, while GDXJ jumped 6.6%.
As for shorts, well we aren't talking about those. Not much works on the short side in days like yesterday. In fact, as our partners at Tier1 Alpha noted this morning, yesterday's action led to one of the most overbought conditions they've seen. Specifically, they wrote:
"As of the close, nearly half of the index had an RSI reading over 70, which isn't just high; it's the most extreme reading we've ever seen."
Talk about a crazy train!
Back to the Global Macro Grind...
I wrote yesterday that the updated financial projections from the FOMC would be noteworthy, with the likelihood that future inflation could be downgraded on the back of declining commodity prices, and they were. Consider the following changes that were made in the Fed's projections:
- Headline PCE in 2024 went from 2.5% to 2.4%;
- Core PCE in 2024 went from 2.6% to 2.4%;
- 2025 PCE was reduced by 10bps on both measures;
- GDP in 2024 was reduced from 1.5% to 1.4% (not that anyone was focused on slowing growth yesterday ... although the Magnificent 7 did underperform); and finally ...
- ... the median Fed Funds rate in 2024 was reduced from 5.1% to 4.6%. With an incremental 30bps of cuts in 2025.
The last point may well be the one that trips up the everything rally because there is now a significant divergence between what the Fed is assuming for rate cuts in 2024 and what the market is assuming.
As noted above, the Fed is now assuming roughly 75bps in cuts next year. While the market via Fed Funds futures, and they do whip around, is closer to 140bps of cuts.
So, there is potentially a misalignment of interest rate expectations building in the market. And as Mark Twain famously said:
"Expectations are the root of all heartache."
But given the lack of immediate catalysts from now until early next year, that misalignment of expectations may not matter much in the short term! So, we shall continue to ride the Crazy Train of precious metals, interest sensitive positions, and, even, crypto. (Which, fortuitously, was bullish Trend in our models going into yesterday.)
Given the extreme move yesterday, it is worth further considering some of Tier1 Alpha's key points this morning:
- Yesterday, option dealers shifted towards maximum long gamma, marking one of the highest levels since 2020.
- Regardless of the direction of the move, market makers were net sellers yesterday as they had to mechanically deleverage their hedges in order to stay delta-neutral.
- Going forward, we’re expecting these hedging dynamics will start to come back in favor, which means large swings in either direction will become less probable, at least until we get through the December OpEx this Friday.
As I noted earlier, no one's shorts or hedges worked yesterday. But that doesn't mean people don't have to hedge because, in fact, many market participants have to maintain some level of neutral or limited exposure.
It is also interesting to note that yesterday saw a record in SP500 call options ... with a notional 840 billion bought. Yikes!
As for economic data and events today, we had the BoE divert from the Fed saying they have a "way to go" on inflation. We will also get the ECB's announcement later today and then November U.S. Retail Sales.
It doesn't feel (there are those feelings again!) like economic data matters much at the moment, but eventually will. It always does.
Hopefully you made some dough yesterday and were at least riding part of the Crazy Train. And don't worry if you didn't nail every move, nobody did and now our job is to play the game in front of us!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.10-4.49% (bearish)
UST 10yr Yield 3.94-4.35% (bearish)
UST 2yr Yield 4.31-4.75% (bearish)
High Yield (HYG) 75.14-77.50 (neutral)
SPX 4 (bullish)
NASDAQ 14,216-14,824 (bullish)
RUT 1 (bearish)
Tech (XLK) 182-193 (bullish)
Energy (XLE) 79.98-84.22 (bearish)
Utilities (XLU) 62.65-66.62 (bullish)
Shanghai Comp 2 (bearish)
BSE Sensex (India) 67,818-71,787 (bullish)
VIX 11.80-15.16 (bearish)
USD 102.15-103.89 (bearish)
GBP/USD 1.250-1.275 (bullish)
CAD/USD 0.732-0.7446 (neutral)
Oil (WTI) 67.20-74.66 (bearish)
Nat Gas 2.20-2.70 (bearish)
Gold 1 (bullish)
Silver 22.20-25.90 (bullish)
Uranium (URA) 28.18-29.66 (bullish)
Bitcoin 41,067-45,029 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
