February Blues pt. 2? Update
The death of inflation has been greatly exaggerated.
The original February Blues pt. 2 can be found here.
Last week was fairly eventful. CPI & PPI came in scorching hot, exceeding even my own expectations.
Deflationists/Disinflationists see January’s CPI & PPI readings as an upward blip in inflation. While team higher for longer believes that the Fed made a pivotal mistake by pivoting in December, and consequently it’s going to take much longer than intended to anchor inflation at 2%.
Nonetheless, the most important takeaway from this in my opinion is:
It’s becoming apparent to the broader market that 7 rate cuts in 2024 was a pipe dream.
This is major because:
This historic rally was induced by unfounded rate cut expectations.
This shift in expectations coincided with February OpEx ahead of seasonal weakness.
Inflationary factors aren’t set to fizzle out anytime soon.
Thus, equities & bonds should respond commensurately to this shift. In fact, it looks like bonds are already responding. They won’t be in limbo for much longer.
Note that the performance drag began after QRA/FOMC and was further exacerbated after the release of inflation data.
As for equities, 5000 behaved as a magnet (markets love whole numbers) and it was also OpEx week.
Judging by this chart, it would appear as if the QRA, which was bearish both equities & bonds, and the FOMC in which JPow was surprisingly hawkish meant nothing.
Irrespective of this, I believe that equities will join bonds in correcting very soon.
As for oil, it’s approaching an inflection point at $80-81/bbl where shorts would need to begin covering quick, fast, and in a hurry if it can get through that level.
The moral of the story is: the brave new world that most market participants envisioned with the war on inflation having been over & won isn’t coming true.
With this in mind, positioning is as follows:
Long June ‘24 69 CL Calls, Long May ‘24 83/90 CL Call spreads
Long June ‘24 4800 SPX Puts, Long Apr ‘24 4800/4650 Put spreads
Would like to see a return to 4650 by mid/late March ideally. Can see NDX at 16400 as well.
Until next time,
Pierre.