Mid-Week Update

August 6, 2024

It’s been an epic start to the week. These sorts of days don’t come around too often and are worth the lessons of a huge multiple of ordinary days. If you have ridden and experienced it, well done on you. This is macro investing at its core. Just talking or writing about it without having had any skin in the game is never going to be the same.

Having gone into this week short risks and long bonds, I trimmed some of that over the past two sessions. Days of insane volatility usually change momentum from one-way, which we have witnessed over the past few weeks, into much more of a two-way chop where things can move against you wildly. This is usually a very noisy period and one that can be directionless for a while. This is also partly reflected in the charts below. This, however, does not change the longer-term theme. Yes, we have priced rate cuts too aggressively near-term, and there was a necessary re-adjustment after speculation came up that an emergency cut would be necessary. Markets will have to take some steam off of some of those extreme tails. The big picture, however, should not be missed as the back-up in yields will give people good levels to go long again. The Fed is going to cut; the cycle will start, and curves will steepen. This is bond bullish unless you believe in the necessity of only a mid-cycle adjustment, which is possible but not my base-case scenario. Even then, like in 1995, bonds initially rallied into the first two rate cuts before reversing higher.

Source: Fred Database

Aside from today’s Atlanta Fed (2.6%), other now-casting services I use are indicating a much more rapid growth deterioration of real-time tracking of around 1.5% for the US. This has come down from around 3% only two weeks ago.

Going forward, the playbook can take multiple paths. The mere question on my Twitter on Monday about a “What if risk rallies this week?” was met with some pretty tasty comments, which indicated to me that it’s not foolish to bet precisely on such an outcome. So, I would ask myself a few questions to highlight what possible paths and opportunities could look like.

Questions like:

Has the JPY carry unwind finished?

What would earnings decline estimates be in case of a slowdown?

Where do declining earnings and multiple compression put the range for the SPX, for example?

What if we don’t get a recession but only freak out about a slowdown?

If this deleveraging isn’t over, what are the next dominoes to fall?

Why wasn’t Gold performing better on Monday and got whacked?

Will the USD really underperform in case of further growth deterioration?

Are commodities, especially Oil, a buy?

US inflation expectations have plummeted alongside bond yields. Are they a buy since we can still expect sticky inflation going forward?

What if we all have been fooled into thinking that this is just a great buying opportunity?

This is just a small section of questions I am currently asking myself. My answers are different to yours.

Let’s now dive straight into the charts and see what has changed in order for us to consider new setups ahead.