Explaining Post-CPI Chop And A Word On Inflation Empathy

Markets chopped around erratically following what it was entirely fair to describe as another disheartening US inflation report.

To be sure, the story is on Main Street, not Wall Street. It’s on Main Street where the real impact of persistently high prices for food and energy hits home, figuratively and literally.

I try to empathize, but I acknowledge what almost no one else will: Empathy is impossible. I reiterate that point time and again because I think it’s important we recognize life’s harsh realities. You can’t empathize with someone in whose shoes you’ve never walked. And even if you have walked in their shoes, you still don’t know how they experience the same hardship you experienced. Empathy, in a strictly literal sense of the word, isn’t possible. “There but for the grace of God go I” is about the best we can do.

Read more: Fed, Voters Get Another Disastrous Inflation Report

With that caveat, it’s back to what, for the fortunate among us, counts as brass tacks: Flickering monitors. Or, more to the point, the unpredictable movement of the numbers they display. Those dancing numbers represent the fortunes of our fortunes, and lately, they’ve been bleak and diminishing, respectively.

When it comes to crafting something like an accurate, real-time story to explain otherwise indecipherable cross-asset chop, Nomura’s Charlie McElligott is in a league all his own. As I emphasize nearly every session, market wraps published by mainstream media outlets are mostly just copy for the sake of it — stories cobbled together by new journalism grads equipped with an outdated Rolodex of yesteryear’s lingo.

Not Charlie, though. “Here is how I’m seeing it,” he began, in a second Wednesday note published a few hours after the inflation data was released. “[The] Fed once again may need to rebuild expectations for more hiking, not less, after today’s surprise beat in MoM CPI,” he said, noting that such expectations “fundamentally perpetuate the medium-term status quo CTA Trend trades,” which in this case means pressing shorts in fixed income and bearish short-end expressions, as well as downside in stocks and crypto, given the potential for another FCI tightening impulse on higher odds for a hard landing.

“[That] was the market’s initial response,” McElligott went on to write, before delivering critical nuance. “However… with event risk again clearing, equities couldn’t hold a new lower range while UST yields remain mid-range and unable to press meaningfully higher again.” I’d note that he was referring to price action seen late in the US morning. So, between the knee-jerk reaction to the CPI data and noon, give or take.

If you’ve ever traded anything (financial assets or otherwise) on any kind of tactical basis, you know there are times when the move you’re looking for doesn’t pan out as dramatically as you thought it might even when you got “it” (whatever “it” is) mostly correct. Often, the best thing to do in such scenarios is get out — of the trade or the car or the house in the cul-de-sac or whatever it is you got into.

“What are you gonna do with your UST / ED$ Downside and SPX / QQQ Puts into looming expiries, or your ‘Dynamic Hedge’ in Equities futures / ETFs shorts?”, Charlie asked, before answering himself. “Probably opportunistically close / cover / monetize them while you’re still breathing, especially with upcoming expiries looming and associated extreme ‘Negative Delta’ from crowded Downside trades at risk of being covered from so much low-strike downside at risk of decaying.”

So, don’t stick around for any raucous, positioning-driven squeeze that might be right around the corner, because by the time something like that’s in motion, it’ll be too late. You’ll be covering into the rally, and insult to injury will be the knowledge that in doing so, you’re perpetuating the very dynamic that’s bleeding you and forcing you to cover in the first place.

The bottom line, Charlie wrote, is that although “the medium-term ‘Tightening Tantrum’ / ‘Hard Landing’ risks remain, you have to trade around your hedges accordingly when the monetization catalyst realizes.”

Of course, once the dynamics described above run their course, markets might revert to trading the “fundamentals” and pushing associated “status quo” trades, which in this case means additional potential downside in equities and bearish short-end rates.


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One thought on “Explaining Post-CPI Chop And A Word On Inflation Empathy

  1. “… the fortunes of our fortunes …” Quite poetic for a finblog (!), and interesting to ponder that our fortunes have distinct and sometimes separate lives from our own.

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