SignalPlus Macroeconomic Analysis (20240517): The Return of the Perfect Ideal Prosperity

The stock price once again challenged its historical high in the morning session, then retreated, while U.S. Treasury bonds also experienced a bearish trend, with short-term yields slightly rising due to a significant increase in import prices (month-on-month growth of 0.7% vs. an expected 0.1%).

There are few important data releases before next Wednesday, when Nvidia's earnings report will be released. The implied stock price volatility from options is +/-8%, slightly lower than its two-year average of +/-8.4% and February's +10.9%. Considering the massive weight of this chip giant in the SPX, an 8% implied volatility means about a 0.4% impact on the SPX, not to mention the sentiment spillover effect on other related stocks in the index.

In addition to the higher-than-expected import prices, the anticipated rebound in oil prices during the busy summer driving season may keep CPI pressure sustained until August. However, inflation traders remain confident that CPI will fall below 2.5% by the end of the year.

The unwavering confidence in inflation and the lack of economic risks have allowed the market to focus solely on interest rate trends, leading to a perfect negative correlation between U.S. Treasury yields and stock prices since mid-December. In other words, stock and bond prices have risen in perfect ideal prosperity, (again) ignoring potential tail risks from further economic slowdown, stubborn inflation, or valuation corrections.

There hasn't been much noteworthy news in the cryptocurrency space, with BTC stabilizing at recent highs and trading activity being subdued. However, Coinbase's stock price fell 9% yesterday, significantly diverging from BTC prices, as investors began to worry that institutions like CME entering the spot trading business would intensify competition in the compliance sector. The entry of TradFi undoubtedly brings the much-needed capital inflow to the industry, but it will also certainly trigger new competition. What will the cryptocurrency market look like in a year or two? We shall see.