How long risk-on?

S&P 500 rejected premarket downswing attempts, and held up pretty well following core PCE data in line with expectations. The interest rate sensitive Russell 2000 was nicely showing the way, and broadening sectoral leadership (with a few flies in the ointment such as XLF retreat) provided enough fuel till profit taking hit before the closing bell.

What marvels a little retreat in 10y yield can do – while Sep 25bp rate cut odds at 44% are practically equal to 43% of rates unchanged (and 12.5% odds of Fed funds rate being 50bp lower than it is now). What a journey from six rate cuts expectation in Dec to three cuts months later, and now maybe one as I have written lately – and Larry Summers is bringing back rate hike into the dictionary.

Stagflation is likewise being raised, and for good reason with quarterly GDP at 1.6% crawl speed and inflation data and expectations still high – I though expect LEIs and global easing (China is looking brighter) to come to the rescue together with still enough of a cushion in TGA and reverse repos. Fiscal willingness to spend is there, always there since the Apr 2020 $3.4T backstop with a long series of following spending bills.

The dollar is pressed, in a flag formation, and I wonder how far above 106.50 it can reach. This is a positive statement, because the greenback hasn‘t yet topped.

S&P 500 and Nasdaq

Source: www.stockcharts.com

As I wrote at the onset of Friday, „yesterday‘s batch of good earnings makes it possible that this key resistance of 5,135 would be overcome so as to provide yet another false breakout a la PPI Thursday lately“.

And so it turned out, providing yet another intraday long opportunity in what‘s developing into a wider and volatile range, with next leg lower slowly knocking on the door. Monday should be calm, and Tue tech with AMZN earnings will provide more volatility, crowned on Wednesday.

While XLF disappointed Friday, it‘s doing really OK considering the rising rates – when it starts to rise, that would be a first confirmation of higher stock prices ahead.

Credit markets

Source: www.stockcharts.com

See continued yields pressure to go higher since I called the range respite in Mar as giving way to a fresh upleg in yields. Stocks made it far considering Friday‘s tiny blip on the chart with short-term yields keeping the full heat on.