SignalPlus Morning Briefing (12 Dec 2023)
Quiet session in markets where equities continued their levitation from Friday, with SPX holding onto their gains to close at near the highs of the year while CPI and FOMC await. On the former, the street is calling for a 0.3% MoM print in November, helping to take core PCE back below the Fed’s 2.5% threshold target. Markets are expecting benign shelter inflation and used car prices to keep inflation in check for this month, though the number isn’t likely to be so soft for Fed to justify the 4–5 rate cuts priced in in for next year.
The year’s final FOMC meeting will follow on Wednesday, where anticipation has been building for the Fed to confront the dramatic easing in financial conditions, as the market is once again trying to lead and compel the Fed to the dovish path well travelled. A quick look at some of the key indicators since the past 2 FOMC meetings shows that GDP, activity tracking, and even payroll gains have largely held in for the most part; however, it is the notable easing in core PCE, CPI, AHE, and oil prices that have gotten market excited, taking down 2026 rate forwards down by an astounding 75bp since the Sep FOMC, and 50bp since October.
In response to the steady economic performance but accompanied by the dramatic drop in implied rates, US equities have thus ushered in the perfect goldilocks setup with the SPX up +3.6% since September and an incredible 10% since November. With the BoE, BoJ, ECB, and Fed all up on the docket over the next 2 weeks, will they make an attempt to correct the market excess? Or will it be steady as she goes? Keep your eyes peeled for the final showing before we call it a year!
While there appears to be little on the horizon that can derail this risk rally, we should begin to enter the beginning of the stock buyback blackout period, which typically tends to happen around 4 to 6 weeks prior to earnings being announced. 2023 YTD buyback authorizations stand at just under $1 trillion, the 3rd strongest year on record, giving yet another pillar of support to the inflappable equity market. Furthermore, there is currently a complete lack of put protection being sought by market participants, with tail hedge costs on US equities tumbling back to 2 year lows, and memories of the March meltdown seemingly a lifetime ago. If the markets have taught us anything over the years?—?it generally pays to be optimistic.
Speaking of tail-hedges, BTC cratered in the early Asia hours yesterday, as talks of a large sell spot order crushed prices from 43.5k down to sub 41k on mini flash crash, unwinding a couple weeks of gains in a hurry, and dragging down the entire crypto complex with it. Nearly 500mm of long futures were liquidated on this down move, reminiscent of the type of regular volatility gaps we saw in the pre FTX days. With positions skewed to one-way longs, but a lack of new FOMO money entering the space (based on the lack of stablecoin market cap growth and soft google trends), we should be on the lookout for more choppiness as positions start to consolidate, and we’ll likely require a ‘correction in time’ before markets can attempt their next move higher again.
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