Resilient data should be the concern, not Fed speak

After a challenging three months characterized by simultaneous selloffs in both equities and bonds, some important investor groups found themselves underexposed. These meaningful reductions in exposure made many cross-asset players susceptible to a renewed market rally, which was in line with the "Santa melt-up" seasonal scenario. 

In just a few days, US equity futures surged by 6%, driven by a sharp decline in long-term US yields. This propelled equities to their best week in a year, while 10-year Treasuries had their best week since a specific past event (referred to as "SVB"). High-grade credit and junk bonds also joined the rally, leading to what is colloquially known as the "everything rally."

Given the sharp contrast between the robust stock surge and the aforementioned underexposure, it's unsurprising that the past week was challenging for the macro universe and long/short investment strategies.

Well, let's hope we don't see a series of new escalations in US macroeconomic data. Strong economic data could upset the proverbial apple cart and reverse last week's perceived economic "softness," which, when combined with the Treasury's decision to undershoot expectations for coupon increases, catalyzed the bond rally that supported the bullish sentiment across different asset classes.

In such a scenario (i.e., with the return of strong economic data), we might find ourselves in a perplexing, self-reinforcing feedback loop involving financial conditions. In fact, you could argue that we are already in that situation due to the resurgence of the "everything rally."

Ironically, it's this rally in longer-dated bonds and the easing of financial conditions that, in turn, poses the biggest threat to the entire trading ecosystem. The risk to all this bullishness in bonds and short-term interest rates comes in the form of "resilient data" and not Fed Speak,  potentially forcing the market to recalibrate expectations about future Federal Reserve policy.