Living Vicariously Through Rate Cut Expectations

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U.S. stock indexes made gains on Tuesday as concerns about an overheating U.S. economy ease, particularly with incoming U.S. economic reports showing data surprises at their most negative levels since February of last year. These developments are reigniting expectations that the Federal Reserve will likely implement rate cuts soon. While sentiment has also been flying high from corporate earnings, which, on aggregate, surpassed expectations, however, Disney was the drag anchor overnight as the entertainment giant stock fell precipitously on a weaker box office, marking its largest percentage decline since November 2022.

Following a turbulent April that saw the S&P undergo a ~5% decline, markets have now rebounded to levels reminiscent of nearly a month ago. This turnaround followed Jerome Powell's actions, which quelled the mounting speculation regarding a potential Fed rate hike by year-end. Powell's move not only maintained the Fed's stance heavily skewed towards an easing bias but also entailed a larger-than-anticipated reduction in quantitative tightening (QT) per month. Indeed the policy mix and match that contemporary stock market players revel in.

As US economic data continues to fall short of expectations, exemplified by the Bloomberg US Economic Surprise Index hitting 14-month lows and witnessing significant deterioration in survey data, the case for cuts is clearly on the table. However, to drive stocks higher, we would probably need to bring forward expectations of at least one more rate cut or experience a string of favourable economic conditions akin to a "goldilocks" scenario.

My concern is that we could easily transition from the "bad news is good" mindset to a scenario where "bad news is bad," particularly if inflation unexpectedly exceeds expectations next week

Indeed, as we approach next week's US inflation metrics, which are stepping into the spotlight, there's a notable concern brewing. The continued decline in survey-based data, which tends to signal future weaknesses in "hard" data, warrants a cautious approach. This sentiment is particularly relevant ahead of this week's University of Michigan sentiment index and next week's CPI release.

Navigating a market environment characterized by waning sentiment and persistent inflation can feel like traversing through a toxic brew. Investors may be inclined to label this situation as stagflation and a scenario where everyone starts heading for the nearest fire exit.


The dollar remained strong, continuing its ascent against the Japanese yen, reaching as high as 154.74 overnight. The Yen appears to be on a collision course with the critical 155 level, despite two suspected interventions by the Japanese authorities last week to bolster the yen. The key question is whether we will see a resurgence of the cat-and-mouse game between CTAs and the Ministry of Finance. If this dynamic comes back into play, the level of 155 in USD/JPY could hold considerable intrigue.

In the meantime, Carry Traders continue to view the Japanese yen as a primary funding currency, as evidenced by ongoing price action that reinforces its established status. Additionally, US Treasury Secretary Janet Yellen's recent remarks, advocating for FX intervention to be 'rare and in consultation,' have not assisted Tokyo's efforts to stabilize the yen.

And despite the long USDJPY squeeze post-NFP to 152 we still have not changed our view that the MOF idea was to stabilize the JPY and buy time for the Fed to eventually cut rates and the natural market forces to take hold.


Oil traders are in a bind this week, stranded on a "deal or no-deal island."

Still, oil prices have dipped from their intraday highs as the perceived risk to physical oil supplies remains low, despite Israel rejecting Hamas' latest ceasefire proposal and launching an offensive into Rafah. The lingering geopolitical flash point and headline risk could keep a bid under oil prices into the weekend, however.

More importantly, concerns about weaker-than-expected economic growth in the US have intensified, overshadowing the bullish sentiment driven by OPEC+ production cuts and tensions in the Middle East. And while the market anticipates a high probability of oil producers extending some output curbs into June. Still, tensions are escalating, particularly with the UAE and Russia pushing for increased production.


Bears are grappling with an uphill battle to construct a compelling argument, but their mantra persists: The Fed's reluctance to entertain another rate hike doesn't negate the fact that the first cut is still months away, and any policy shifts will require time to manifest. Add to that concerns about unprecedented market concentration, lingering inflation worries, stretched valuations, and simmering geopolitical tensions.

While these concerns hold merit, macro doom narratives often overlook a critical element: timing. Throughout history, many have sounded the alarm bells, predicting imminent market downturns, only to witness continued upward momentum. Timing the market accurately is notoriously challenging, and betting against its resilience can incur significant losses.

In the trading business, there are no free tickets, and it's especially challenging for new traders to avoid becoming capital donors for firms promising overnight success.

The rise of sensationalist social media has not helped matters blurring the distinction between informative analysis and entertainment. Fear is a powerful monetizing motivator, driving “ blue check” bloggers to compete for attention with clickbait headlines.

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