Thoughts going into this week's data, and a new podcast

In my post last week, I discussed my market thesis that current levels in yields are too restrictive for the economy, resulting in US data coming in weaker than expected. ISM surveys, April non-farm payrolls, Q1 GDP, and various second tier data all point to US employment inflecting lower over the next several months. The unemployment rate is only 10-20 bp from triggering the Sahm rule, a threshold that would make the Fed concerned about a recession and compel them to cut rates much more aggressively than what is priced into the market. In this scenario, the dramatic loosening of financial conditions should be friendly for risk assets.

Yields haven’t really moved much over the past week, as the market is still stuck on the “higher for longer” narrative. Equities have recovered a bit, but that has been driven by the compression in equity and bond implied vol creating a systematic bid in the market, rather than expectations of a looser Fed. Today we’ll get US PPI inflation data, and tomorrow will be the US CPI and retail sales double-header. This week’s data will be the first test of whether my disinflation thesis is taking hold in the market.

There are two categories where CPI inflation can catch down, based on model estimates. CPI rent was unexpectedly high during the last three prints, despite rents trending lower. If CPI rent was to catch down, that would be a disinflationary tailwind for the next few months.

Source: Piper Sandler

Used car prices are a volatile and influential category, and they have the potential to catch down as well.

Source: Piper Sandler

I caveat that trying to outsmart economists in predicting whether the CPI will come in higher or lower than expectations is a tough game to play. A better trading strategy is to judge market positioning going into a big data point such as CPI, as well as potential flows that might follow.

In FX, long USD positioning is stretched, which suggests that the market reaction to a low CPI print would be larger than the reaction to a high one:

Speculators are heavily short Treasury futures across the curve:

And in US equities, systematics have room to add to long exposure. According to Goldman:

Global Equity - CTA’s Over the next 1 week…(Green sweep). 

a. Flat tape: Buyers $17.6B ($13.2B into the US)

b. Up tape: Buyers $16B ($12.6B into the US)

c. Down tape: Buyers $4.6B ($7.6B into the US)

Jerome Powell has also skewed the potential market outcomes by saying that he thinks policy rates are currently restrictive, and that he is unlikely to hike anytime soon. That suggests there is not much pnl upside to be short front end SOFRs/Treasuries, while there is a lot of upside to being long if data continues to come in weak.

For day traders and hedge fund managers who must avoid downside pnl shocks, it makes sense to not run positions going into data. My trading style is an amalgamation of fundamental analysis, reading flows and positioning, and charting, and I put on trades with a multi-day to multi-week time horizon, so it doesn’t make sense for me to square up ahead of the 2-3 big events on the economic calendar every month. Often I rely on the economic data to validate my thesis and take the market to where I think it’s heading. The asymmetrical backdrop makes me feel pretty good about being positioned long risk, short USD, and long front end SOFRs/Treasuries. If you’re a paid subscriber, you can see how I’m positioned in the Substack chat.

If you’re new here and are interested in how I express views like this in the trades I put on for my own trading account, consider upgrading to a paid subscription. Trading is much more than having a view on the market - it involves putting on the best expression of the view (such as what currency to short USD against, or what part of the Treasury curve to long), how to time your entries and exits, and how to properly risk manage your positions throughout the life of a trade. In the paid subscriber chat, I post when I’m putting on a position with my own trading capital and exiting it. It’s not meant to be a trade signaling service, but it’s as close as most people will get into the thought process of an experienced trader.

For those who are in crypto - I cover only BTC and ETH as I want to keep this blog mostly about global macro, and avoid getting too deep into the crypto weeds. Most of the crypto content I read lacks useful insight into global macro, so this is the gap that I aim to fill. In the move from 33k to 72k, my long term and tactical trading of BTC captured over 51k points, outperforming a HODLing strategy. In every post I discuss the market regime (risk on or risk off) that we are currently in or transitioning into.

Finally, my friend Sunny and I are trying out launching a new podcast called “Greed Is Good”. It combines global macro analysis with insights on the latest crypto projects and narratives. Check out Episode 1 and give us a follow!

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