As noted early Tuesday, markets are frozen in time (so to speak).
Everyone is edging gingerly towards the boundary of an event risk minefield that will need to be traversed, starting with Apple’s earnings and proceeding apace to the Powell presser, trade talks (now clouded by the Huawei charges) and key data on Friday.
It is, Nomura’s Charlie McElligott writes on Tuesday, a “nobody move, nobody gets hurt” type of standoff, defined by the following (from McElligott’s morning missive):
- As the data stabilizes (which it is currently attempting now, with Citi U.S. Economic Surprise Index pivoting back “positive” to+1 from -25 on Jan 3rd)—or even accelerates higher—we re-enter that “tighter financial conditions” negative feedback loop, as the Fed is ultimately forced back-into the picture;
- Conversely, if the data were to again slow further from here, it confirms that “glass half-empty” current investor view that “the best is behind us” and that we have “overtightened ourselves into a slowdown”
- Essentially, for the Fed to “get more dovish” at this point, it would require a major downdraft in U.S. economic data or another market volatility spasm—which is NOT something that is going to help the mood
Here’s the Citi index, for reference.
For now, folks seem happy to “rent” the risk rally, Charlie notes, content to enjoy it while it lasts as the “patient” Fed narrative overrides the laundry list of macro concerns.
McElligott reminds you that according to research from his colleague George Goncalves, the “flow vs stock dynamic in the Fed balance-sheet change ‘impulse’ (the ‘change of the change’ / QoQ balance-sheet movement)” tips a possible QT-related pickup in vol. in Q2. We talked about that at length on Friday following WSJ’s balance sheet trial balloon. Here are the charts (see linked post for more):
And here’s a handy “QT calendar”:
As far as Charlie’s CTA model is concerned, we’re back in what he calls “no man’s land”, where that means “buy to cover” levels are a long way away, as are “press short” triggers (2,790 level-to-buy on SPX, 2,477 level-to-sell).
So, where to now? That’s just it – nobody knows. That’s why it’s a standoff.
We’ll have some clarity by the end of the week, though. What we would (again) point out is that CAT and Nvidia set the tone on Monday, and while a successful communications effort from Powell combined with an effort from the administration to tip “progress” in the trade talks could well negate the bad vibes from those two bellwethers, if anything goes “wrong” on Wednesday, Thursday and Friday, traders will likely harken back to CAT and NVDA for confirmation bias to support a negative outlook.