Markets

Tuesday’s advances in U.S. market indexes came as worries over an overheating economy in the country subsided, especially in light of recent economic reports that showed data shocks that were at their worst points since February of last year. These events are rekindling the belief that rate cuts from the Federal Reserve will probably occur shortly. Although overall corporate profits exceeded forecasts, sentiment has also been extremely positive. However, Disney was the weak link overnight as the company’s shares dropped sharply due to a poor box office, marking the biggest percentage decrease since November 2022.

The S&P witnessed a roughly 5% loss during a wild April, but markets have already recovered to levels similar to those of over a month ago. This reversal occurred after Jerome Powell’s actions put a halt to the growing conjecture about a possible rate hike by the Fed before year’s end. Powell’s action involved a larger-than-expected decrease in quantitative tightening (QT) per month in addition to maintaining the Fed’s strongly easing tendency. Yes, the policy mix and match that today’s stock market participants love.

The argument for cuts is undoubtedly made as long as US economic data continues to disappoint, as seen by the Bloomberg US Economic Surprise Index plunging to 14-month lows and survey data showing a considerable decline. But, to push equities higher, we would likely need to anticipate at least one rate cut or have a run of favorable economic circumstances that resemble a “goldilocks” situation.

 

I worry that we might quickly swing from a situation where “bad news is good” to one where “bad news is bad,” especially if inflation surprises everyone by exceeding forecasts next week.

There is a significant worry building as we approach the US inflation measurements that are coming into the spotlight next week. A cautious approach is warranted by the ongoing deterioration in survey-based data, which tends to indicate future problems in “hard” data. This sentiment is especially pertinent in light of the University of Michigan sentiment measure released this week and the CPI announcement the following week.

Getting about in a market where optimism is fading and inflation is still there might be likened to walking through a poisonous mixture. Investors could be inclined to call this a case of stagflation, where people start running for the nearest fire escape.

Forex

The dollar held its strength and continued to rise against the Japanese yen, hitting an overnight high of 154.74. Despite two alleged interventions by Japanese officials this week to support the yen, the Yen looks to be headed straight for the crucial 155 level. Whether the cat-and-mouse game between CTAs and the Ministry of Finance will resume is the crucial question. If this dynamic resurfaces, the USD/JPY level of 155 may be rather intriguing.

We continue to believe that the MOF’s goal was to stabilize the JPY and buy time for the Fed to eventually lower rates and for natural market forces to take hold, even in light of the protracted USDJPY squeeze that occurred after the NFP to 155.

Oil Markets

This week, oil traders find themselves stuck on a “deal or no-deal island.”

Despite Israel rejecting Hamas’ most recent ceasefire offering and going on the offensive into Rafah, oil prices have nevertheless dropped from their intraday highs as the perceived risk to physical oil supplies appears to be low. However, there’s a chance that the headline danger and persistent geopolitical flashpoint will keep oil prices low through the weekend.

More crucially, the positive mood fueled by OPEC+ production cutbacks and Middle East tensions has been eclipsed by worries about slower-than-expected economic growth in the US. Furthermore, the market believes there is a good chance that oil producers will continue limiting their output until June. Nevertheless, hostilities are worsening, especially as Russia and the United Arab Emirates are pressing for more output.

Ramble

Bears are finding it difficult to make a strong case. Still, they continue to repeat the same line of thinking: the Fed’s unwillingness to consider another rate hike does not change the fact that the first cut is still months away and that any policy changes will take time to materialize. Concerns over historically high market concentration, persistent inflationary fears, stretched valuations, and simmering geopolitical tensions should also be included.

Although these worries are legitimate, big-picture doomsday stories frequently forget one important detail: the timing. Many have raised the alarm and predicted impending market downturns throughout history, only to see the market continue to rise instead. Accurately timing the market is notoriously difficult, and wagering against its resiliency can result in large losses.

There are no free passes in the trading industry, and it can be particularly difficult for novice traders to avoid giving money to companies that guarantee quick success.

The line between meaningful analysis and entertainment has become increasingly hazy due to the rise of sensationalist social media. Fear is a potent monetization tool, causing “blue check” bloggers to vie for attention-grabbing headlines.