All’s Well That Ends Well

The market has been very quick in swallowing and digesting this Tuesday’s less than ideal inflation data from the US – which showed that inflation in the US didn’t ease as much as expected in January, remember that data? It was just two days ago, it was supposed to be important, and potentially trend changing. Interestingly, the kneejerk market reaction remained short lived. The fact that inflation in other places, like in the UK, didn’t pick up certainly helped cementing the idea that, this is certainly just a blip in the disinflation trend, and if it’s not, the Chicago Federal Reserve’s (Fed) Goolsbee said that slightly higher inflation data for a few months will still be consistent with a further easing toward the Fed’s 2% target. Staff at the European Central Bank (ECB) sounded more poetic, posting the world’s cheesiest central bank message ‘roses are red, violets are blue, we’re nearing our target, and we will reach too’. So, it’s in this atmosphere of love and hope that investors got their thoughts together and put on their dip-buyer heads, went out there and chased good deals – if you can call them good at the current levels.

And know that even The Big Short’s Michael Burry – who is famous for shorting stocks and who was short the chip stocks last year, short the S&P500 and short the Nasdaq – has no more short positions in his portfolio according to the latest 13F filings. The most famous short trader of the history threw in the towel. He is now long health and tech stocks.

The S&P500 rebounded almost 1%, technology stocks led rally. Uber, for example, jumped nearly 15% after announcing its first-ever buyback of $7bn to celebrate its first-ever annual net profit since it became public. Its Asian competitor Lyft jumped more than 60% but that was a mistake – the company was confused between 50 and 500bp. It’s more than just one zero on a press release.

Now, back to serious stuff, the US 2 and 10-yer yields retraced the post-CPI jump on market’s ignorance of the inflation risks that should delay the first rate cut from the Fed. The US dollar gave back field. But note that, despite the bulls keeping their faces on, the expectation of Fed rate cuts is not what it used to be at the start of the year. Investors will focus on retail sales, and some manufacturing indices today to continue guessing when the Fed will move. Stronger retail sales should weaken the Fed doves, while soft manufacturing should support them. The market pricing suggests 3 fully priced rate cuts, and a fourth cut priced at around 70%. That’s less than the 4 rate cuts priced for the ECB.

As such, the euro’s depreciation against the US dollar remains well supported by fundamentals. There is one thing, though. The dovish ECB expectations are fueled by soft growth and falling inflation in the euro area. But a broadly stronger US dollar is inflationary for the rest of the world because everything from commodities to oil are negotiated in USD terms. Therefore, the hawkish shift from the Fed and a stronger US dollar could lead to an undesired U-turn in European inflation, soften the ECB doves’ hand and throw a floor under the EURUSD selloff.

Happily, energy prices are not yet threatening enough. In this context, the barrel of US crude fell sharply, after trading above the 200-DMA, as the latest EIA data printed an 8.5-mio barrel increase in oil inventories last week. Nat gas futures continue to dive as well, driven by soft demand due to record high production, ample supplies, and mild winter both in Europe and the US.

Elsewhere, data released this morning in Japan showed that the country unexpectedly entered recession in Q4. The economy shrank 0.1%, while analysts were expecting a 0.3% expansion. The private consumption declined for the 3rd straight quarter. If the latter didn’t trigger a fresh selloff in the Japanese yen due to the heavy threat of direct intervention.