WEEKLY MACRO NOTE - Lower Lows

Reading Time: 7 mins

The day you let your last bad trade interfere with your next good one is the day you’ve lost.

Bears continue to be scared senseless of a rally while Bulls are relentlessly trying to pick a bottom. This has led to a market which continues to chop investors up and leave very few winners.

It would be easier if we got a multi-week rally to short, but the game is not easy.

An investor is like a craftsman, and like any good craftsman, he needs to have tools he can rely on at particular moments in time to help him make decisions under uncertainty.

Through this newsletter I am not trying to give you specific trades, instead, I am trying to help you to build a framework for understanding the market and develop tools so you can make decisions when it matters the most.

TABLE OF CONTENT:

• A NOTE ON CPI

• WEEKLY WRAP UP

• SENTIMENT

• THE WEEK AHEAD

• ECONOMIC CALENDAR

A NOTE ON CPI

CPI Day has become the Macro Noise event of the month, where a small beat or miss can lead to +/-3% swings in the SPX.Do you really think it changes anything whether the number is 7.9, 8.1 or 8.2?

As long as investors continue to bet on a Pivot, the Fed will remain Hawkish.

Remember that every time the market, and particularly the inflationary components (think Energy), reflate, this forces the Fed to stay tighter for longer.Thus Pivot watchers are their own worse enemies.

Now eventually the Fed is going to have to pause, but we are not there yet.Markets are currently pricing in a 97% probability of +75bps in Nov

And as of this week are now pricing in a 67% probability of another +75bps in Dec.

The December probability is quite surprising to me as I personally thought +50bps to be the likely outcome, but I have been wrong on this before, while Fed Watch predictions have been remarkably accurate.

It certainly appears that the Fed is aiming to get the Fed Funds rate to around 5% by early next year as opposed to the previously anticipated 4.5%.You should not forget that even when the Fed gets to 5% and stops tightening, that will still be the highest interest rate we’ve had in 15 years.

Pausing is not easing.

WEEKLY WRAP UP

Now you would think the market was oversold, and ready for a counter-trend rally, but the truth is, as long as people think that that is the case, we are just going to continue to grind lower.

Last week brought new lows to most equity marketsSPX -1.55%NDX -3.05%DJI +1.24%RUT -1.16%

On Thursday post CPI the SPX sold off -2.8% within one hour and made new circle lows before rallying over >+5% in the next 5 hours and closing up + 2.60% on the day.

There was one thing you could have looked at to understand this move through the day, Put/Call ratios. As the market squeezed higher they tanked.

Investors sold their puts and bought calls, forcing dealers to scramble and perpetuate an incredibly fast move higher.

By the end of the day, Put/Call Ratios were at some of their lowest levels of the year.Index Put/Call was 0.99Equity Put/Call was 0.66

Investors were once again unhedged and unprepared, it should have been to no ones surprise that the next day markets sold off and made new weekly lows.

If you want to make sense of this market on an intraday basis there are many things you need to keep an eye on, particularly Bonds and FX.

Bonds continue to sell off and rates make new highs across the curveUS2YR 4.49% up +4.27% WoWUs10YR 4.02% up +3.53% WoWUS30YR 3.99% up +3.99% WoW

The Yield Curve remains deeply inverted and touched -52bps on Thursday, the most inverted since 1981.

The USD/YEN has provided ample risk-off signals to investors all week, with the Dollar making new highs against the Yen every single day.USD/YEN +2.31% WoW

The dollar wrecking ball continues to trounce all, and as long as this continues you should expect no reprieve in Equities.CAD/USD was down -1.07%AUD/USD lost -2.61%, as the RBA hiked rates by a mere +25bps last week.This is what I mean when I say the Fed is forcing everyone to tighten, or else….

CHF/USD -1.09%, as the safe haven currency appears to not be such a safe haven after all.The Swiss National Bank has had to tap into its Swap Line with the Fed for over 3T dollars.Remember this is the same National Bank that over the past decade thought it a good idea to buy AAPL and FANG stocks and hold them on their balance sheet.Now they have become one of the largest sellers.

EUR/USD was down -0.22% WoW while the GBP/USD rose +0.77%

I would not read much into the Pound activity during such a Noise ladened period given the latest Government reshuffle and Liz Truss making an absolute blunder of her start of the Premiership.

10YR GILTs sold off once again this week, and the UKs Yield Curve inversion deepened to -43bps.

I continue to stress that the activity in the GILT market has little to do with the Budget and a lot to do with the activity of the BOE & FED, which is causing years of risk, which had been previously hidden under the carpet, to come out and show its ugly face.

A key barometer I always keep an eye on is High Yield OAS Spreads.In the US High Yield is trading at +525bps over TreasuriesIn Europe High Yield is trading at +630bps

In previous crises, these have blown out to well over 700bps.While they are currently trending higher, I do not think current levels are a cause of concern to the Fed.

Note that you can track these via proxy ETFs such as HYG & JNK

I know everyone is most interested and concerned with equities, but all of the above is extremely important in helping you understand the underlying structure of the market. Daily, many different moving parts will give out plenty of hints as to how equities might trade in a short to medium-term time frame.

If you rely solely on the chart of the SPX and the VIX you are likely to miss a lot.Understanding and tracking all of the above will help provide you with valuable signals.

GOLD is another useful indicator, and sure enough it did not buy the rally on Thursday declining -0.42% and closed the week down -2.95%

Lastly a couple of internationally equity callouts worth making.

The Singapore STI Index dropped -3.38% last week, making its first major lower low, as the Monetary Authority of Singapore tightened rates for the 4th time this year.

Meanwhile, the Shanghai Composite SSE rose +1.57% last week, most likely being propped up ahead of the CCP congress which starts today and will be running all of next week.The PBOC has now joined the list of major central banks having to interfere in the FX markets as it tries to prop up the Yuan which declined -1.19% last week and is trading a 7.2 to the Dollar.

Dollar up DXY +0.49% meant CRB Index declined -3.12% led by energy with WTI down -8.30%

XLE is in an interesting spot and if OIL manages to make a higher low at these levels it may well break out to new highs.The supply dynamic is well known, but as investors continue to pile into energy, I would urge caution for if WTI does not hold the $80 level and broader volatility picks up, then another washout may be in play.

CHART OF THE WEEK

The options market remains a gambler's casino with a record 40% of options volume now being traded in 24h before expiry

SENTIMENT

It is clear investors are quite bearish.

This is hardly surprising after 3 straight quarters of declines in the S&P and 18 months of declines in growth and other highly speculative ventures.

ARKK is down almost -80% and has wiped out 5 years' worth of gains.

But the real question is are they positioned bearish?

By Tuesday, 2 days ahead of CPI, traders had reduced their S&P shorts and gone Net Long the Nasdaq.I repeat, Net Long the Nasdaq!

Couple this with Put/Call ratios which closed the week at some of the lowest levels of the year, and I am inclined to think that as bearish as investors may be, many are choosing to sit on the sidelines, too scared to short despite the troubling set up.

Index Put/Call ratio closed the week at its lowest level since Spring of 2020

THE WEEK AHEAD

Last week I close my note by asking a very simple question.Why shouldn't the market make a new low?

We have now made new lows, and yet I almost feel like asking you the same question again.

Instead, I will leave you with another chart to ponder.

Equity Volatility (VIX) continues to substantially underperform both Bond Market Volatility (MOVE) and FX Volatility (EVZ)For how much longer this can be sustained I do not know.

What might the catalyst for equity Vol to pick be? That is anyone's guess.

But from a levels point of view, I do think that SPX 3400 needs to hold, for if bulls do not manage to stage a rally from there, a break below may ignite a major panic and sell event.

ECONOMIC CALENDAR

Have a great week, and once again thank you for reading,

Antonio C Nobile

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