The macro market now faces a conundrum, where market participants are trying to figure out how Central Bankers interpret economic data.
The surprising US ISM data below 50 on Tuesday caused the drop in the stock market on that day and some risk-off sentiments throughout the week. S&P 500 ends 0.3% lower this week at 2952.01, despite almost a 2% drop last Wednesday.
We can observe that it’s still far from a widespread panic, for example despite of lower AUDJPY (strangely still somewhat valid as a global proxy for risk!), Asia currencies were still supported and in fact, we saw some heavy selling and price action in USD IDR, USDKRW, etc. (means ‘risk-on’ in Asia EM world).
The yield curve is steepening – which is probably due to unwinding, some Treasury supply and normalization from the recent squeeze in the Repo market – negates any risk-off sentiment spill-over in the Rates space.
In the US stock market space, technology and healthcare sectors were the winners while the energy sector was among the laggards (oil futures dropped 5.5%). This is another indication that market sentiment is not strong.
Last Friday’s non-farm payroll was worse than expected at 136K, however, the market strangely (or not) jumped 1.42% higher. Why is the stock market cheering on a higher possibility of lower growth? As we had discussed some time back, it is due to the distorted expectation that the Fed will turn to ease trajectory (the market is pricing in another rate cut by December this year). The problem is – Fed may not consider the fundamental economy to be a point of weakness.
Next week CPI’s data is another important variable to predict Fed’s next step. While this week’s US politics is revolving around Trump, his Ukraine’s involvement and Democrat’s impeachment initiatives, next week the US and China are expected to resume their trade talks, which market will pay attention to.
At this stage, it’s probably better to be agile and simply look at relative values, and avoid any long-term macro conviction. Even gold long-trades seem pretty crowded at the moment!
