There are several important things I want to cover in this note that will frame how PCE plays out tomorrow and how FOMC unfolds next week.

First, the most recent CPI print didn’t cause a complete macro regime shift but it did cause a shift in positioning to have a significantly higher sensitivity to economic data releases. Why? because the most recent CPI print increases the inflation risk considerably. I laid out these tensions in this report:

As a result, of this inflation tension and its impact on rates, equities have been dragged down from their highs. Coming into this week, the implied vol premium was significantly greater than the macro force being exerted by rates on the valuation side of equities. I noted this in the week ahead report and had a long equity view.

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Second, as we moved into this week, the PMIs and GDP print were the main focus.

The PMIs came in below expectations along with GDP. However, I want to point out several things with the GDP print. Notice that consumption, investment, and government spending all remain squarely positive. This is key!

Goods consumption turned marginally negative but services remain incredibly strong:

Fixed investment actually accelerating showing significant resilience to the higher rates. This was being led by residential housing. The main idea: growth is not collapsing due to the higher rates, FOR NOW. The time will come when these line items will show weakness but we arent close to that period of time yet.

These data prints are impacting equities as the stock-bond correlation is positive. Bottom line, the steepener and long end of the curve are putting downward pressure on stocks. We saw the low in the Asia session last week get bought aggressively and then the GDP print today get bought aggressively.

Notice that when the impulse for the curve steepening fades, equities begin to mean revert. This is textbook price action for the type of macro regime we are in.

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Trades and Positioning:

With this context, I want to get into how the flows are likely to play out into the PCE print tomorrow.

Here is the risk-reward I shared for ES on Sunday, April 21st: (link)

It is critical that you follow because I will be doing a podcast with him over the weekend covering more on this:

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Big picture though, you don’t want to be taking large swings in equities, the R:R I shared is onsides and the implied vol premium has fallen considerably. This is why understanding the PCE print and rates tomorrow will be crucial.

Macro Insights/Report: Flows, GDP, PCE and…

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