Equities Breakout Data Confirming FED Pause
US Govt 7Y Auction drives bonds off lows
Alright with a slew of data and considering the equity markets have been teetering with busting out of their year long plus downtrend, todays move shouldn’t be a surprise. We saw a continuation move all night through Europe and out of the gate on the NY open. The bulls are in control now and they do have a lot of things going in their favor. We will start to see the case build for the FOMC to remove their rate hikes sooner than later and any, and we mean any hint of a lower terminal rate, will shoot equities much higher. Now don’t get us wrong, we all know and Magnelibra paints the picture all the time that equities tumble once rate cuts commence, but only you know that, dumb retail out there will continue to buy, after the rate cuts but you will know better.
Anyway let’s look at the Nasdaq and SP futures and see what the breakout looks like. Actually the Nasdaq has been leading, which should be expected considering the complex dumped 33% last year:
Targets in the Nasdaq will be 12750 and 13250 respectively and we will not sell till those levels are reached, we do not pick tops nor chase as you know but remain cautiously bullish with those targets in mind and 11750 as the support area followed by 11600 and 11380.
As far as the SP500 4182 is the clear target here and you can see that compared to the Nasdaq 0.786 retrace 4182 is about 120 points away and 13250 is 1200 points away so you can see there is a chance if the NQ outperformance to pick up some spread product outperformance. Just to put that into $$ perspective the SP move is 120*$50 = $6000 and the NQ move would be 1200 * $20 = $24000. Now we aren’t saying put this spread on blindly, rather what it points out is the outperformance of the SP vs the NQ during this year long plus downtrend as Tech was liquidated. Post covid Tech was the new Safety trade but that was all taken away in 2022:
Today we say huge demand for the US Govt 7Y auction which was preceded by well bid 2Y and 5Y auctions earlier in the week and today was no exception as demand was massive led by foreign buyers. The stop through was about 2.1bps compared to the WI and were a quite sure bond arbs made a killing, that is if they knew what they were doing! This auction pushed yields lower and continued the onslaught of cash US treasury buyers in the 30Y complex which is benefitting from spread product being lightened pre FOMC from all the steepening trades that have been put on. The US 30Y basis has been well bid since the 23rd with consistent heavy buyers in the complex:
As you can see the 30Y is basically unchanged with both the 10s and 5s up around 3bp respectively:
In regards to todays data, we can only say the Real Estate market data is trending in the wrong direction in regards to the MoM trend of sales which were prior +8.2%, +5.8%, and todays number +2.3% MoM. This was better than the -4.4% expected but that 5.8% was also revised to just 0.7% in November. The New Home Sales continue to hold the floor though. We suspect demand will continue in areas of migration like Texas, Florida, Arizona etc and California, NY, Illinois will continue to see declines. We can’t help but think the migration will start to effect local municipalities as their pension and debt obligations will need to be funded somehow:
We continue to see Initial Jobless Claims fall, however don’t be misled, with layoffs still coming we know severance packages can be a few months long, so we expect this data to be delayed. We can point to the ongoing continuing claims for a better gauge of what is in the pipeline now and we can only suspect this trend will continue to rise:
We also had Q4 GDP which was higher than expected coming in at 2.9% exp 2.6%. We want to highlight the QtoQ change in prices which should alleviate the FOMCs concern about inflation as this trend is very obvious:
Ok traders, stay on your A game, we have made this a free note so that others can share it and or give others the kind of insight needed to be successful and improve your game. Trading and Investing are two of the most difficult concepts to undertake. It is a constant battle against, time, money, perception, ego’s, weakness and a whole host of other exogenous inputs. We can only tell you that you need to understand monetary policy, finance, economics, mathematics, etc and you need to hone these skillsets each and every day. Sometimes it is a battle against yourself and that can be one of the most difficult battles of all. Perseverance is the key to overcoming obstacles, so do not underestimate your will, your talents your drive and always keep your faith in yourself, that is the biggest key…its like the movie the Matrix when Morpheus tell Neo,
What are you waiting for, you are faster than this, Don’t think you are, Know you are! -Morpheus, The Matrix 1999
Here is the clip below and if you have never scene the movie, we highly suggest you watch it. We truly believe there are many parallels to how one should believe, think and understand our reality. Breaking through the “Matrix” or being “Blue Pilled” are memes that we have known for quite some time. You have to believe in yourself, you have to think for yourself and in the world that we exist in today, know one thing…That is anything is possible!
Here is the link, The Matrix
Ok thank you and we hope you learned something today.
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