Stocks After Trump Greenland Drama: Will PMI Ruin the Rally?

Macro Money - Market Analysis & Outlook (January 25th)

Key Concepts:

• Greenland Crisis: US President Trump’s initial threats regarding Greenland (tariffs, potential use of force) and subsequent de-escalation.
• Policy Uncertainty: Elevated levels of economic policy uncertainty stemming from presidential actions and disputes with the Federal Reserve.
• PCE & CPI: Personal Consumption Expenditures (PCE) and Consumer Price Index (CPI) – key inflation gauges monitored by the Federal Reserve.
• PMI: Purchasing Managers' Index – an indicator of economic health, with S&P Global and ISM providing data.
• Shadow Fleet: Network of tankers used to circumvent sanctions, primarily transporting oil from Russia, Venezuela, and Iran.
• Rate Cut Expectations: Market anticipation of potential interest rate cuts by the Federal Reserve.
• Risk Premium: The extra return investors demand for taking on risk, often reflected in bond yields.

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I. Market Reaction to the Greenland Situation & Broader Policy Concerns

The market experienced a brief sell-off triggered by President Trump’s aggressive rhetoric regarding Greenland, including threats of tariffs and potential military action. This mirrored a similar reaction in April of last year following “Liberation Day” tariff announcements. The initial response involved a “sell America” dynamic – declines in stocks, the dollar, and bonds, coupled with an increase in risk premium pushing up yields. The situation de-escalated following the President’s speech at the Davos World Economic Forum and a subsequent agreement with NATO Secretary General Mark Rutte regarding US access to Greenland, including potential mining operations and expanded military presence.

Despite the de-escalation, the market hasn’t fully recovered to pre-crisis levels, suggesting lingering concerns. This hesitancy is attributed to a pattern of policy volatility since the beginning of last year, encompassing issues with Venezuela, disputes with the Federal Reserve (including a potential DOJ investigation into Fed Chair Powell), and ongoing tensions with China. The prevailing market sentiment anticipates continued volatility and a desire for “cheap money” (lower interest rates) as a safety net. As Spac stated, “the markets continue to look at this with an eye to rate cuts and saying, 'Well, we understand that everything here is uh going to be volatile because this is the president's negotiating style.'”

II. Economic Data Review – Inflation & Growth

Recent economic data presents a mixed picture. The October and November PCE data showed inflation rising from 2.7% to 2.8% for both headline and core readings, but this was largely anticipated and considered “stale” given the release of December’s CPI report. The Fed is observing a plateau in goods inflation, aligning with their expectations, while service sector inflation remains a more significant contributor to overall CPI (1.8 percentage points of the 2.7% headline reading) but is showing signs of cooling.

More recent data, specifically the S&P Global PMI, indicates a stabilization of economic activity after a slowdown in the fourth quarter attributed to the longest government shutdown on record (43 days). While growth slowed, it didn’t fall to catastrophic levels. Notably, the ISM PMI data showed a stronger recovery in the service sector, resulting in a composite PMI indicating some of the strongest economic activity since mid-2023. The third quarter GDP growth reached 4.4%, the highest since the third quarter of 2023, and the Atlanta Fed’s GDPNow model currently projects 5.4% growth for the fourth quarter.

III. The Fed Dilemma: Strong Growth vs. Rate Cut Expectations

The robust economic data presents a challenge for the Federal Reserve. Despite the strong growth, markets continue to anticipate rate cuts, driven by the ongoing policy uncertainty. Currently, the market is pricing in 42 basis points of cuts for the year – slightly less than two cuts, with a 68% chance of a second cut – while the Fed itself projects only one cut. This disconnect is highlighted by the fact that the S&P 500 has remained relatively flat since the Fed cautioned against overestimating rate cuts in October.

The elevated Economic Policy Uncertainty Index, currently at levels comparable to the peak of the COVID-19 pandemic, further fuels the demand for easier monetary policy. Trade policy uncertainty, while easing from its April 2023 peak, remains volatile. The disruption to global trade, partly due to this uncertainty, threatens the AI boom – a key driver of recent market performance – as the AI supply chain is heavily reliant on global trade.

IV. Oil Price Concerns & Inflationary Pressures

Rising crude oil prices add another layer of complexity. Events in Iran and Venezuela, coupled with the increased seizure of Russian “shadow fleet” tankers (estimated to transport around 20% of global oil supply), are disrupting oil supply chains. This disruption is forcing China to purchase oil on the open market at higher prices, potentially impacting global oil prices. Spac notes that “what all of these moves do is they supp they disrupt the supply of the incognito oil shipments that those shadow Russian tankers transport.”

The expectation is that these oil price increases will translate into higher CPI figures with a roughly one-month lag, potentially complicating the Fed’s decision-making process regarding rate cuts. The combination of strong economic growth and rising oil prices makes it more difficult for the Fed to justify easing monetary policy.

V. Trading Strategy & Outlook

Based on this analysis, Spac maintains a long position in gold, reflecting a hedge against uncertainty and inflation. He has flipped his US dollar position to short, anticipating continued weakness. He remains short Bitcoin, expecting it to underperform in a risk-off environment. He is also short the bond market via put verticals on IEF (intermediate-term Treasury ETF) and TLT (long-term Treasury ETF), anticipating rising yields. Finally, he maintains short positions in the S&P 500 (SPY) and Nasdaq (QQQ) via put verticals, believing that any market recovery will be weak and unsustainable.

Notable Quote:

“the markets continue to look at this with an eye to rate cuts and saying, 'Well, we understand that everything here is uh going to be volatile because this is the president's negotiating style.'” – Spac

Technical Terms:

• Basis Points: A unit of measurement used in finance, equal to 0.01% (100 basis points = 1%).
• Shadow Fleet: A network of tankers used to circumvent sanctions, primarily transporting oil from Russia, Venezuela, and Iran.
• GDPNow: A real-time tracking tool developed by the Atlanta Federal Reserve to estimate US GDP growth.
• Vertical Spread (Put Vertical): An options strategy involving the simultaneous purchase and sale of put options with the same expiration date but different strike prices.

Conclusion:

The market remains sensitive to geopolitical risks and policy uncertainty, despite the de-escalation of the Greenland situation. Strong economic data and rising oil prices present challenges for the Federal Reserve, potentially limiting its ability to deliver the rate cuts that the market desires. Spac’s trading strategy reflects a cautious outlook, prioritizing hedges against volatility and anticipating continued market headwinds. The key takeaway is that navigating the current environment requires a nuanced understanding of both economic fundamentals and the unpredictable nature of policy decisions.