Price action suggests incoming USD strength and weakening growth

I’ll start this post with some observations about the current global macro backdrop and market price action:

• Fed funds futures are pricing in a 80% probability of a 25 bp cut in March and 166 bp of cuts in 2024, despite a number of Fed officials pushing back against this pricing in their public statements. There is also a lot of skepticism among global macro analysts that the Fed can deliver on this many cuts.

• Despite the pushback on Fed cuts, Dec SOFR futures barely reacted to the strong NFP and CPI prints, and instead rallied to a new high on Friday after a weaker than expected US PPI number.

• Speaking of the PPI release - the downside surprise implies the Fed’s favor inflation measure, core PCE, will come in at 0.2% for December and at a 3 month and 6 month annualized rate of slightly below 2.0% (according to JP Morgan).

• FX has been directionless and choppy. Indecision has crushed volatility. USD had trouble selling off on Friday despite Fed cut expectations hitting new highs.

• The market can’t decide on whether the US and global economy will slide into a disinflationary bust or reaccelerate into a reflationary boom from here. I’ve heard good arguments supporting both scenarios.

• The ISM services employment print that came out over a week ago is a number I can’t stop thinking about. The magnitude of decline was the type of drop that you only see going into recessions. Either it was a short term blip that will be corrected, or it is a sign that this “soft landing” is about to get bumpy.

  

  ISM services employment

• The SPX couldn’t rally on Friday despite SOFRs hitting new highs. SPX has been rangebound despite more Fed cuts getting priced in on a soft PPI. Perhaps the equity market is getting crowded?

  

  SPX (blue) vs SOFR Dec 2024

Finally, I wanted to share an interview of Danielle Dimartino Booth and George Goncalves on the Forward Guidance podcast discussing how weak the US data has been beneath the headline surface.

These are the conclusions I can draw from the above observations and price action, and a new trade that I’m putting on: