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:
Interest Rate Report: Volatility!
Hello everyone, The most recent CPI print has caused a significant change in markets that needs to be contextualized correctly. Cross-asset volatility has increased as positioning is shifting. The S&P500 broke the 5200 level and the macro moves are only just beginning. No one is ever prepared for macro vol because they are so focused on their individual…
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.
Week Ahead: Risk Premias and Alpha Generation
Intro: After spending the weekend rethinking and reanalyzing things I want to reframe things marginally and explain how I am thinking about running trades for the next 4 weeks. Main idea: macro volatility is back and this will require further active decisions in order to outperform broad beta. Additionally, it will be incredibly important to be nimble over the next 4 weeks. For example, we had an incredibly strong rally in oil during an overnight session that immediately reversed the next day. The same thing happened for stocks and bonds. These TYPES of move are incredibly high frequency and require split-second decisions to actively take advantage of them.
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.
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: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.
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