Weekahead: People are focused on the wrong thing

Key signals for this week

Hey everyone,

I wrote several articles over the weekend. Be sure to check them out:

• How to build an S&P500 Model: Link

• An Analysis of the S&P500 as we move into FOMC: Link

• Why you always need to think in probabilities: Link

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There are two major things I am watching going into this week. The first is the inflation prints (CPI and PPI). The second is the speeches by FED officials. 

We have CPI on Wednesday and the consensus is expecting a deceleration in BOTH headline and core:

Here is the thing though, the consensus is really focused on “confirmation” of the July rate hike that is already priced in the forward curve. This is a little ridiculous to me. Let me explain why. 

We have had a 70%+ probability of a July rate hike priced in for a while now. Since none of the economic data has decelerated significantly and nothing is blowing up, there is no reason to “watch for confirmation.” It is almost certainly going to happen unless something blows up between now and FOMC: 

The thing you should be watching is the September rate hike pricing. Powell has said multiple times that he plans to hike TWO more times. Could July be the last hike? Sure. But at the moment, the September contract is only pricing a 28% probability of a hike. 

If CPI comes out hot or the FED speakers allude to a second rate hike, the September contract could reprice to a much higher probability. What is the implication? A lot more upside in 2-year yields. 

Here is the 2-year bond future (inverted) and the September contract pricing the probability of a rate hike: 

This brings me to my second point: the FED speeches. Here is the schedule for them: 

Here is the deal with the FED speeches. I know some people say they don’t matter or they are irrelevant. In my mind, if it moves the red and green colors on my screen, I care about it. There have been multiple times this year where FED speeches moved the forward curve so listening to these speeches as they potentially talk about another hike will be key. 

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Watch Gold price action in connection with these flows as well. 1900 is a key support level in gold:

The final thing I will say is to watch which parts of the curve are leading the bullish and bearish price action. Is the YC flattening or steepening as we move through these economic events? I would also go do a study on ES price action surrounding CPI releases, there is alpha you can extract from the hedging flows here. 

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No matter what, map the probabilities and stay in the game! Markets are meant to be chaotic.

Thanks for reading!