Stock Market Rebound: Time to Buy the Dip?

Key Concepts

• Market Performance: Analysis of past week's market movements and current week's opening performance.
• Risk Sentiment: The general attitude of investors towards risk-taking, influenced by economic data, earnings, and central bank policy.
• Fed Policy Expectations: Market anticipation of future Federal Reserve interest rate decisions, particularly rate cuts.
• Economic Data: Key economic indicators such as PMI, PPI, and retail sales, and their impact on market sentiment.
• Intermarket Analysis: Examining the relationships between different asset classes (stocks, bonds, commodities, currencies) to understand broader market trends.
• Yen Intervention: Potential actions by Japanese authorities to influence the value of the Japanese Yen.
• Fiscal Policy: Government spending and taxation policies, particularly in relation to Japan's new prime minister.
• Inflation Expectations: Market beliefs about future inflation rates and their influence on sentiment and central bank policy.
• Liquidity: The ease with which an asset can be bought or sold without affecting its price, often reduced during holiday-shortened weeks.
• Dollar Strength: The performance of the US Dollar against other major currencies and its implications for risk sentiment.

Market Performance and Risk Sentiment

The week began with a rebound in Wall Street's performance, contrasting with the dismal outlook at the end of the previous week. This raises the question of whether this holiday-shortened week will sow the seeds for a recovery in risk sentiment.

Past Week's Performance (Painted in Red Ink)

• Stocks: Aggressively down.
  • S&P 500: Off 2%
  • NASDAQ: Off 3.1%
• Yields: Down across the board, indicating a "haven bid" for bonds.
• Crude Oil: Down.
• Gold: Relatively steady. Notably, gold, which had been acting like a risk asset in recent weeks, showed some anti-risk support, declining less than other risk-linked assets.
• US Dollar: Broadly higher, reinforcing the risk-off mood.
  • Euro: Off almost 1%
  • Yen: Down 1.2%, despite a late-week rebound due to potential intervention threats from Japanese officials.
• Bitcoin: Off by double digits (10.4%), following a 9.3% decline the prior week, indicating a strong risk-off vibe.

This past week's performance was characterized by a "capitulation-flavored intermarket layout," although the moves were not of capitulation magnitude, and markets remained closer to record highs than in a freefall.

Current Week's Opening Performance (Firmer Tone)

• Sentiment: Holding up from the open, with momentum carrying over from futures markets.
• S&P 500: Up 1.7%
• NASDAQ: Up 2.8%
• Yields: Showing a bit more pep.
• Crude Oil: Slightly more pep.
• Gold: Posting a meaningful rise of 1.23%.
• Euro: Relatively steady, modestly lower.
• Yen: Again, a little bit lower, but its movement is increasingly independent due to intervention threats and the narrative around new Japanese Prime Minister Takahayishi's expansionary fiscal policy, echoing Shinzō Abe's policies. This suggests the yen may not be the usual barometer of risk sentiment at this moment.
• Overall Vibe: Clearly risk-on, echoing a friendlier view on Fed policy. Yields and sentiment are celebrating, gold is up, and the dollar is soft against most major counterparts.

Evolution in Fed Policy Expectations

A key driver of the current market sentiment is the shift in expectations regarding Federal Reserve policy.

• Rate Cut Odds: Markets have increasingly priced in a rate cut for the December 10th meeting, with a rate cut now considered more likely than not. This trend has been consistent since the October 29th Fed meeting.
• October 29th Fed Meeting: Following the second rate cut, Fed Chair Jay Powell signaled that December was not a foregone conclusion, leading to a market pullback.
• Market Pricing vs. Fed Anticipation:
  • Current market pricing for next year indicates 68 basis points of rate cuts, significantly exceeding the Fed's projection of a single rate cut.
  • A December rate cut would merely align with the Fed's current stance, not overshoot it.

The question remains whether the current rebound has legs or is merely a corrective move within a broader downtrend.

Supporting Economic Data and Earnings

Despite the risk-off sentiment of the previous week, several factors suggest underlying economic strength.

• Earnings:
  • S&P 500 (Q3): 13% year-on-year growth, described as solid if not strong.
  • Tech Sector: 27% year-on-year growth, despite a notable miss from Meta among the Mag 7.
  • Nvidia: Reported solid results last week.
• Economic Data:
  • Government Shutdown: Derailed much of the data, but recent releases are not soft.
  • S&P Global PMI (November):
    • Services Sector: Rebounded, being the largest part of the economy.
    • Composite Index: Follows services, showing multi-year highs similar to late 2024 and early 2022, before the Fed's rate hikes.
  • Conclusion on Economy: From this measure, the economy does not appear to be in terrible shape.
• De-escalation of US-China Tensions: Concerns from early October have largely unwound.
• Government Shutdown Over: A significant headwind has been removed.

Inflation Expectations and Sentiment Disconnect

A puzzling observation is the disconnect between declining one-year inflation expectations and the lack of a corresponding improvement in sentiment.

• Historical Correlation: Historically, sentiment has been closely tied to inflation expectations. When inflation expectations build, sentiment declines; when they fall and the Fed cuts rates, sentiment improves.
• Current Disconnect: Over the past four months, moderating inflation expectations have not translated into improved sentiment, suggesting a potential "time bomb" or a shift in market drivers. However, current overall growth levels do not indicate this is an immediate issue.

Upcoming Economic Data and Market Outlook

This week, being abridged due to a US holiday, is expected to have thinner liquidity. The economic data releases are largely backfill from the shutdown.

Key Data Releases:

• September PPI Report: Expected to rise 0.3% month-on-month. The shallow rise is not expected to dislodge the trend of anchored wholesale inflation and does not suggest a significant build-up from tariffs impacting consumers.
• Retail Sales (September): Expected to rise 0.4% month-on-month, following a 0.6% rise in August. Year-on-year retail sales have been creeping higher, matching some of the year's highs in August, which were the highest since mid-2024. This indicates supportive numbers for consumption, the core of the economy.
• Durable Goods Orders (Wednesday): Also on the calendar.
• Assorted Releases: Covering October and potentially some November data, but official announcements are pending.

Analysis of Data and Sentiment:

• PPI: Unlikely to derail Fed rate cut expectations if within recent outcomes.
• Retail Sales: Month-on-month rises have not shown a dramatic drop-off, suggesting no acute economic deterioration. The year-on-year growth is supportive.
• Disconnect with Sentiment: There appears to be a disconnect between supportive retail sales data and current sentiment. If September retail sales were to show a sharp decline as consumer sentiment numbers might suggest, it could further solidify Fed rate cut expectations and potentially boost markets.

US Dollar Performance and Risk Rebound Suspicions

The US dollar's performance is a key indicator that raises questions about the sustainability of the risk rebound.

• Dollar Strength: The dollar has not dislodged from its recovery that began in mid-September.
• Contradiction: If Fed policy expectations are becoming more dovish and markets are reacting positively, the dollar should be weaker.
• Dollar as Anti-Risk Asset: The dollar has held up as an anti-risk asset, even rebounding as the Fed began its rate cuts.
• Implication: If the dollar cannot start selling off around a rebound in risk assets, then the rebound in risk might be suspect.

Current Exposure and Strategy

The speaker's exposure has not significantly changed from the previous week.

• Long Gold: This position is working.
• Short Major Currencies against the US Dollar: Reflecting the dollar's relative strength.
• Short Risk: Despite the recent meaningful rebound in assets like Bitcoin, the Russell 2000, and the S&P 500, this move is viewed as corrective. The speaker is prepared to exit this exposure before giving up any substantial gains.
• Bonds: The view remains constructive, with further progress observed. Duration on this position has been extended to 53 days.
• Long Silver: Added last week, anticipating further gains in precious metals, which held firmer than overall risk assets last week, suggesting newfound resilience against risk aversion.
• Short Oil: Still maintaining a short position, despite today's rebound, as the overall direction continues to edge down.

Program Schedule and Further Information

• Macro Money: Airs Monday through Thursday, immediately following "Overtime."
• Short Week: Due to the US holiday, the show will air today and tomorrow, returning the following Monday.
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• Social Media: The speaker comments at @iaspac on former Twitter and on Blue Sky.
• Writing: The speaker writes for the news and insights section of tasty.com.

Conclusion/Synthesis

The market is experiencing a rebound driven by a more dovish outlook on Fed policy, supported by generally solid earnings and economic data. However, a disconnect exists between declining inflation expectations and stagnant sentiment, and the persistent strength of the US dollar raises questions about the sustainability of the risk-on rally. Upcoming economic data, though historical, may offer further clues. The speaker maintains a cautious stance, with a strategy focused on precious metals and a short-risk bias, while closely monitoring the dollar's behavior as a key indicator.