My Thoughts on the Trading Week Ahead: 5/13-5/20
After a largely quiet macro week last week which saw indices grind higher, volatility get smoked and risk assets generally perform well, we are transitioning now toward a heavy macro calendar with earnings season for the most part behind us (NVDA reports post close on 5/22). This is options expiry week with Vix expiry on Wednesday morning and regular options expiry on Friday which tend to keep vol under pressure to start the week but then we get an opening of the window of weakness by the close of the week where the resetting of hedges can allow the markets to trade a bit truer after Friday. Notably, the time between this expiry and the June expiry is 5 weeks which means the vanna and charm buyback flows will be less than usual in the early part of the period starting next week which means that the markets can be more susceptible to larger macro movements should they come about. Share buybacks are back in the market, CTAs are largely long stocks although systematic positioning flows are off their highs, and we start the week with dealers in positive gamma positioning.
The most important news coming out this week will be the combination of the PPI and CPI on Tuesday and Wednesday respectively, as well as Powell speaking on Tuesday 5/14. Powell will have the PPI in hand when he gives his comments but in theory, should not have the CPI yet. Powell’s performance at the May press conference was once again more dovish than positioning suggested as he hold firm to the idea that rate hikes are still not expected and this put a half of an interest rate cut back into 2024 pricing, allowing equities to trade well to start the month of May. That being said, various Fed members speaking over the course of the last couple weeks have reiterated more hawkish outcomes regarding the stickiness of inflation, especially housing inflation, such that while a hike still doesn’t appear likely, the idea of interest rates being cut ahead of the election continues to get priced out. There is a loud voting wing at the Fed that is very hawkish (Bowman, Bostic, Barkin, Waller) and since I continue to think Powell cannot start an interest rate cutting cycle without unanimous consent, it is going to take a while for this bloc to start moving back dovish unless we start to get a very significant deterioration in the labor data.
After a moderately softer than expected payroll print earlier this month as well as softer ISM services readings, I don’t believe Powell is likely to stray much from the messaging he gave on May 1st unless the PPI is very hot (consensus looking for 0.2% core vs 0.2% core last month and 2.3% yoy vs 2.4% yoy last month). However, if CPI is hotter than expected on Wednesday (0.3% core expected vs 0.4% core last month, 3.6% yoy vs 3.8% last month), I would expect the markets to rapidly price back out the incremental easing that was done post the press conference. That is likely to be a risk off catalyst. On the flip side, a very soft CPI is going to put more caution behind the idea that the economy could be re-accelerating and that inflation is likely to continue to surprise on the upside so should that scenario play out, I think markets will price back in cuts and I would expect a risk on rally to ensure (gold up, stocks up, STIR stronger). I likely will have some STIR long hedge on for the print to hedge by currently short small caps/long gold outlook.
The other potential news of the week is more geopolitical in nature with talks that Putin could be traveling to China later in the week and some discussion that MBS is traveling to Japan early next week. I have been discussing these geopolitical dynamics a lot lately in the channel and will continue to do so. I think gold continues to replace USTs as neutral settlement asset amongst BRICS countries which is keeping USTs under pressure (higher yields) while Yellen continues to have a lot of duration to sell every month from now until forever. Broadly speaking, I suspect we are going to continue to see rising yields, rising term premiums and higher compensation needed for the private sector to take down this capacity, which should keep pressure on risk assets over the next week.
I am short small caps as my preferred vehicle to capture what I think will be pressured risk markets in the weeks to come.
I remain long gold and long $/jpy
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