Morning from Copenhagen.

Growth in the U.S. continues to weaken, with yesterday’s retail sales report confirming the trend. While the control group figure (which excludes autos and other volatile categories) was decently strong, the overall report offered little optimism on U.S. consumption. The headline index missed by 0.4 percentage points, and January figures were revised downward by 20-30 basis points across categories. This revision masked what would have otherwise been a clear downside miss.

Adding to the weak narrative, the Empire Manufacturing print came in 18 index points below consensus. While its predictive power for ISM has diminished post-pandemic, it is yet another signal that macro surprises in the U.S. continue to roll over.

The key question now: How much of this continued weakness is already priced in?

Given the steep equity selloff over the past two weeks, how much more downside is left? Is a 100k NFP print enough to trigger the next leg lower, or would it take a flat or negative print to push equities firmly lower?

With a large portion of long positioning already wiped out, the direction in equities is less clear than it was over the last two weeks.

Historically, there has been a strong risk/reward in being net long equities during the FOMC meeting (i.e., the two-day meeting starting today). Investors demand a premium to hold equities over an FOMC meeting and press conference, particularly in environments like the current one:

“Based on one-year rolling averages, we find the pre-FOMC drift to be positive for the vast majority of the 1980-2011 sample. Pre-FOMC returns tend to be higher in periods when the slope of the Treasury yield curve is low and when implied equity market volatility, as measured by the VIX index, is high.”

Chart 1: Macro Surprises Continue to Be Weak