In today’s briefing:
- No Signs of Major Dollar Deleveraging, but Fed Policy Conduct and Inflation Backdrop Warrant Caution
- How the USD Could Sink the S&P 500
- A Battle Royale for Control of the Tape
- US Economy Watch: The Recession That Never Came… Or?
- Positioning Watch: Energy is not (yet) a consensus
- The Weekly Market Monitor – The ECB’s Unreasonable Hike While the UK Falls into Recession
No Signs of Major Dollar Deleveraging, but Fed Policy Conduct and Inflation Backdrop Warrant Caution
- Foreign banks’ reliance on commercial paper in the US has contributed to a much bigger compression in their net interest margins, contributing to fears that dollar deleveraging could be imminent.
- US current account deficits produced large dollar outflows that facilitated offshore funding centres. The end of secular disinflation and arrival of structurally higher interest rates could create gradual dollar deleveraging.
- Fed policy conduct is crucial to gradual deleveraging , particularly quantitative tightening’s impact on corporate bond yields. Dollar exchange rate movements in 2023 are inconsistent with major dollar deleveraging.
How the USD Could Sink the S&P 500
- The USD has historically been inversely correlated with U.S. equity prices.
- A number of risks are appearing to put upward pressure on the USD, namely a differential in fiscal dominance between the U.S. and other economies, and upward pressure on inflation.
- The possible reversal of the BoJ’s easy monetary policy, while Yen bullish and Dollar bearish, is bearish for global risk appetite.
A Battle Royale for Control of the Tape
- Both the S&P 500 and the NASDAQ 100 are forming wedge formations while testing their 50 dma supports with directional implications on breakouts or breakdowns.
- We believe the odds favours the bears and the S&P 500 has unfinished business to the downside.
- The index can find support at its August lows at about 4350. Strong secondary support can be found at roughly 4200, which is about the site of the 200 dma.
US Economy Watch: The Recession That Never Came… Or?
- We see near-term upside risk to inflation. The labor market is softening in tandem with growth in real wages (rising LCI)
- Consumer sentiment is shifting and spending is showing weakening tendencies. A 2024 services payrolls recession has to be the base-case still.
- We remain invested in sectors with a high sales relative to employees. The current tightening cycle would be the most expeditious in history not to cause a recession, if the hopes of a soft- / no landing hold true.
Positioning Watch: Energy is not (yet) a consensus
- Over the past week we received the monthly Fund Manager survey suggesting that UK and Europe are now (clearly) underweight relative to benchmark allocations, while also China is essentially un-investable according to the survey.
- Interestingly, the survey also reveals that managers are still not net/net long Energy relative to benchmarks, which is an interesting observation given the performance in that sector in recent months.
- With energy outperforming indices, higher rates typically follow as well.
The Weekly Market Monitor – The ECB’s Unreasonable Hike While the UK Falls into Recession
- The awkward and conflicting statement of the ECB accompanying the tenth and likely final rate increase.
- Chinese credit growth remains tepid at best, signaling downside risks for equities and the Euro.
- Three ugly UK recession charts this week will put additional pressure on the British Pound. And our Fear & Frenzy is agonizingly close to Frenzy territory, triggering a sell signal.
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