The market is hellbent on pricing in cuts, even when the data is hawkish. This is an interesting dynamic and the FOMC/BoJ meetings next week will be key to gauging the trend from here. Maybe markets have just ignored anything but crazy Bill Dudley this week?

All it took for markets to unwind their macro-divergence trades was Powell confirming the beginning of a new cycle by hinting at a September rate cut in advance, coupled with some positioning squaring ahead of the vacation season. We’re now seeing the ramifications unfold, with positioning being squared across assets and USDJPY converging back towards fair values. But are we done talking about central banks here? Not really… The market is getting ahead of itself. Here is our FOMC/BoJ preview.

Are small-caps back in fashion or was the rotation short-lived? We have looked at various factors of relevance to this question and the conclusion is that you should not jump the bandwagon.

The equity scare seen throughout July with Nasdaq losing terrain against Russell was likely not the beginning of a longer rotation from large to small cap, but rather normalization of extreme positioning. Markets are still heavily long large caps, while the Russell bid is slowly vanishing.

Our short metals trade is starting to work very nicely, but we are also sensing the early stages of a turnaround in the consensus on metals. Meanwhile, the oil trade is currently quiet, while natural gas is bouncing for good reasons! It’s time for our Commodities editorial!

Our positioning gauges show that markets fully price in continued equity momentum and 50 bps worth of rate cuts in H2, which means that markets will now need to find value trades elsewhere. There’s also substantial support from AMs towards the short vol trade, but watch out… Is this a recovery, a re-acceleration or a slow-down?

The inventory data is starting to support our bearish view on copper, while the precious metals story depends on whether we are in a bull- or bear-steepening scenario. Loads of copper will arrive on Western exchanges before the end of the month.

Take aways:  This currently looks more like normalization than weakening  More fuel to the story of an income driven cycle The productivity / disinflation story of ‘23 likely a hoax The post Covid labor market has been especially good for low skilled workers Welcome to this short labor market watch on the back of this week’s NFIB and CPI numbers. Currently the labor market has softened considerably from tight conditions in 2022, yet there is still some time before this slowdown potentially leads to a recession. From the NFIB numbers we already got more hints of the deflationary trends suggested by this month’s CPI report as price plans continue their decrease. For more on the CPI release, you can find our breakdown here.  Chart 1: Currently this looks more like normalization than recession  From the dashboard below our main takeaway is the lack of recessionary vibe that pockets of the market are screaming about. The optimism index has been rising over the past quarter and inflation is still looking like a far greater threat to small businesses than interest rates. Also noticeable is the drop in price plans for the next 3 months which has been grinding lower over the last quarter fueling the disinflationary story in the US… Small businesses giving Powell the green light to start rate cuts if yesterday’s CPI report wasn’t enough?  In the job component there’s a notable disparity between job openings and employee compensation, with the gap reaching its third lowest level since 2000. […]

Ay Caramba! This is exactly the kind of soft inflation report the FOMC had hoped and prayed for. Interestingly, celebrations are also being heard in Beijing and Tokyo, which may drive broader asset allocation trends in the coming weeks. It’s time for a blow-out top now.

In this primer on USD liquidity, we aim to discuss why and when liquidity matters, and also highlight the two major drivers of liquidity until New Year’s. Liquidity will continue to improve.

The soft-flation vibes from China could impact the inflation report from the US, but the insurance category remains a dark horse. We see a report mostly in line with consensus with dovish risks in headline inflation.

There are currently no signs in broad positioning data that indicate markets are truly betting on a recession, which poses a brighter outlook for risk-assets than some are fearing.

Freight rates continue up, but we are yet to see the broad repercussions. Meanwhile, we are getting mixed data signals from the US economy and shipping companies, hinting that being long energy/commodities is NOT a no brainer.

It’s not that we neglect the risks of a recession; rather, we find the risk/reward in pursuing these concerns in the markets to be unfavorable. At present, the economy does not appear weak enough to warrant running for the hills.

The growth input has started to turn shakier in the US, and our high-frequency indicators have flatlined for July. Inflation is softening (before a potential revival in H2-2024), while liquidity is improving. Here is what it means for markets..

Markets have been eagerly chasing bullish price action in JPY pairs since Ueda’s appointment, constantly expecting different outcomes from meetings and speeches. But what if BoJ doesn’t want the JPY to strengthen?

Another horrendous ISM Services report has catapulted recession chatter right back into the limelight. As the ISM Service numbers admittedly look recessionary, we take a look at the pros and cons of trusting the ISM signal.

While there are still substantial premiums priced into European equities and bonds relative to other regions, it has not truly spilled over to FX, where volatility has barely moved. Are markets starting to board the Europe-train again?

Crude oil’s strong performance and rising freight rates signal potential inflation pressures, despite current weaknesses in goods inflation and metal prices. The market is though not overly scared of it (yet), but the curve steepening is a first hint of something brewing beneath the surface.

There is a solid risk/reward in betting on a hawkish surprise to the European HICP numbers in June as the market consensus is soft. Beneath the hood, some of the forward-looking indicators show signs of continued disinflation.

The outlook for USD rates is turning increasingly soft given the latest soft inflation prints, and with PCE consensus Friday looking relatively soft, the trend will likely continue over the coming weeks. Do we agree? No, and neither does fast money.

Markets were allowed to run past the previous line in the sand of 160 in USDJPY, and we are hence stopped out of our position.